16 November 2017
Is your business ready for Making Tax Digital? In the near future, you’ll need to move your accounting and tax returns over to a purely digital, online way of working – and for many businesses, that’s going to mean some big changes to their accounts system.
Making Tax Digital has been a big topic of discussion in accounting circles for the past couple of years. But if you’re a business owner, CEO or FD, what does Making Tax Digital actually mean for you, your business and the way you manage your finances?
We’ve pulled together the key things you need to know about the move to digital tax accounts, so you can start planning ahead.
Making Tax Digital (or ‘MTD’ for short) is the Government’s initiative for making it easier to manage your tax, using the latest in online digital technology.
The key drivers behind this move to digital are to improve the access HMRC has to businesses’ financial data, reduce the errors currently made when businesses submit their tax returns and, by doing so, bring in an estimated extra £8bn in tax revenues to HMRC. This is explained in the most recent MTD policy document:
“The majority of [HMRC] customers want to get their tax right but the latest tax gap figures (2014 to 2015) show too many find this hard, with a cost to the Exchequer of over £8 billion a year due to avoidable taxpayer mistakes. In 2014 to 2015 over £3.5 billion of revenue was lost due to these mistakes in VAT returns alone.”
“The majority of customers want to get their tax right but the latest tax gap figures show too many find this hard, with a cost to the Exchequer of over £8 billion a year due to avoidable taxpayer mistakes Making Tax Digital policy document, July 2017
So, to rectify this problem, HMRC has set out on the path to digital tax accounts.
What this means is that the way you submit your accounts and taxes to HM Revenue & Customs (HMRC) is about to change in the near future. Rather than submitting paper returns at the end of the year, individuals and businesses will submit digital tax returns on a quarterly basis – making it easier to plan, account for and pay the tax you owe.
The idea is that this digital approach will have four key benefits:
All sounds great so far, right? There will be less paperwork, less filling out of forms and the whole process of getting your tax done could be automated and carried out in real-time.
But for MTD to work, it means every freelancer, every small business and every corporation in the UK having digital accounting software in place – not to mention every accountancy firm in the country also having a similar online accounting software platform at the heart of the practice.
18% of UK accountants are still using paper ledgers, according to recent research commissioned by the team at Xero online software. And if accountants are still using paper-based systems to work out accounts and tax, this doesn’t bode well for creating a UK tax system that’s based entirely in the digital space.
In short, your business needs to start thinking very seriously about finding an accountant and an accounting system that meets the digital requirements of MTD.
So, if you’re going to be digital ready by 2019 (the initial deadline for VAT-registered businesses with turnover above the threshold), what are the key MTD changes and updates you’ll need to action as a business?
Here are four key steps to action:
With these four key actions taken care of, you’ll be in a far better position once digital tax accounts become a mandatory requirement for your business.
The big question you’ll no doubt be asking is ‘When does Making Tax Digital kick in?’. And if you’re already a VAT registered business with a turnover above the VAT threshold, the answer is ‘in less than 18 months!’.
These are the main milestones for the revised MTD timetable:
|April 2018||VAT pilot||Small-scale pilot of digital-only VAT returns|
|April 2019||Quarterly VAT||For VAT-registered businesses with turnover above the VAT threshold, it will be mandatory to pay digital-only VAT returns each quarter through their digital account|
|April 2020||Corporation and income tax||Sole traders and partnerships with income between £10k and £83k p/a to pay their corporation and income tax through their digital account.|
These deadlines will come around faster than you think, so it’s important for your business to plan ahead and get your financial systems ready for the MTD changes.
You’ll also need to register and get a Government Gateway account and, eventually, have your DVLA records, council information and other information all stored there – with two-tier identification becoming compulsory to access your account.
If you’re looking to switch to a modern accountant and the benefits of working in the cloud, we can help you make that transition as smooth and seamless as possible. We’re a Xero partner, and work exclusively in the cloud to help our clients manage their finances and keep their tax management and planning working for their business.
With only only 18 months until quarterly digital VAT returns are mandatory for VAT registered businesses that meet the VAT threshold, it’s important to start planning now for the move to digital – so come and talk to us early so we can help you make that switch.
Find out more in this Making Tax Digital guide from Xero
The FD Works team of accountants are based in Bristol and Bath. We work ambitious startups, growing scaleups and established businesses throughout Bristol and Bath.
Talk to us about moving to a digital accounting systemCall us for a chat