How the Making Tax Digital plans could affect your business
With the planned roll out of HMRC’s Making Tax Digital in April 2019, initially just for businesses that are VAT registered, there is a big push by the government on bringing tax accounting into the 21st century and creating the online revolution in this area that has already occurred in sectors such as banking.
The system has been piloted with businesses on a small scale from the end of 2017, and this has been stepped up into 2018 to include a wider live pilot. While there are no plans as yet to mandate individuals and businesses into the online filing system – which is part of HMRC’s plan to make tax more manageable for businesses and individuals, and to make it more efficient and accurate – it is worth understanding what it is all about and how it might affect your business in the future.
Why is HMRC launching Making Tax Digital and who does it affect?
HMRC wants to close a tax gap that is costing the government dearly, and is largely due to inaccuracies in tax returns – not as a result of tax avoidance or fraud, but simply mistakes that are being made when filling out tax returns. The plan is to mandate businesses into the system that are VAT registered. These businesses already file VAT online quarterly, but HMRC is integrating digital record keeping. This means that if the business or their accountant uses accountancy software, the accounting records will also be sent along with the VAT return, to make the whole process seamless. For business that use spreadsheets, the data from these can be linked to HMRC’s system using an appropriate interface.
There is the opportunity for businesses to provide quarterly update for other tax obligations too, but they won’t have to do this. Small businesses and individuals won’t be mandated into the system at all in the near future, as the introduction of it in VAT is a trial and must be proven to work well before it is rolled out on a large scale. However, we expect that this should happen eventually as the digitisation of accounting and tax return filing evolves.
Embracing the opportunities that Making Tax Digital will bring
So, if you’re an individual who files a tax return, a sole trader or limited company with no VAT obligation, you can sit back and relax for the moment. But rather than see the Making Tax Digital initiative as a potential future headache that involves more frequent tax information updating, it should be embraced as an opportunity to negate the headache of end-of-year tax return filing and a chance to look at overhauling your book keeping for the new digital era.
Many small businesses will still be keeping paper records of accounts and expenses logs/receipts, or using spreadsheets to keep track of income and expenditure. This works well for many people, but is the equivalent of cheques and a paying in book at the bank! We all use online banking services these days and benefit from a higher level of convenience that this brings. Getting tax accounts into a simple software system that keeps all records electronically, safely in the cloud to avoid loss of important documents or security breaches, and easily accessible by both business and accountant, is the way forward.
Not only will you be glad when it comes to end of year filing that your accounts are up-to-date, in one place and available to your accountant, but your business will benefit from the foresight and planning capability that having real-time accounts brings. Having your expenditure and income figures to hand whenever you need them means you can easily review the status of your business and better plan for business growth plans such equipment investment. You will know your likely tax liability well in advance to plan your finances accordingly.
It is just a matter of time before digitalised book keeping becomes a mandatory requirement, so while there is no need to panic just yet, why not get ahead of the curve and start now for plain-sailing transition.
Adams Moore offers Xero accountancy software. For further details on this, get in touch on 01827 54944.