Digitalising the tax system has been a hot topic on the government’s agenda for several years now. My earlier blog “I’m a sole trader – will I need to submit 4 tax returns a year?” outlined the government’s initial proposals on Making Tax Digital (MTD).
The last year has seen a huge response from the business and accounting community, not so much quashing the idea of digitalisation but campaigning for more time to address some of the issues facing small businesses. Thankfully HMRC has seen sense enough to delay the roll out of MTD.
Here’s a reminder on what MTD is and a summary of the new updated timetable (announced on the 13th July 2017).
What is Making Tax Digital?
MTD is all about making tax administration more efficient and making individuals tax affairs more transparent by implementing a fully digital tax system.
HMRC believe tax revenue is lost due to careless and avoidable errors in record-keeping by tax payers. I suspect this view stems from the assumption that individuals who do their bookkeeping and tax return in one fell swoop come January are more prone to making errors.
To encourage more accurate and timely record-keeping the government want businesses and landlords to record their income and expenditure digitally and then report their figures quarterly to HMRC via software. The annual tax return as we know it (online and paper will be abolished).
HMRC reason that recording business information regularly will mean fewer omission errors – receipts will not be lost and sales will not be forgotten. Data submitted directly by software to HMRC will eliminate transposition and omission errors when completing online or paper tax returns.
Taxpayers will have a more real-time picture of what tax is due on their profits and when it must be paid via their own Personal Tax Accounts. There’s more information on the taxpayer portal here.
The original plan was for a compulsory switch to digital record keeping by April 2018.
Thankfully, due in part to pressure from the business community, accountants and the Treasury Select committee, HMRC has seen sense and announced an extension to these very unrealistic deadlines.
The New Updated Timetable
VAT registered businesses with turnover over the VAT threshold (currently £85,000)
You will need to keep digital records for VAT only from April 2019. “Other taxes” will come under the scope of MTD for these businesses in 2020.
Businesses mandated to use the MTD system will need to submit VAT returns using MTD compatible software. They will no longer have the option of filing VAT returns using HMRC’s online portal.
If you have registered voluntarily for VAT i.e. your turnover is under the VAT threshold you can choose to comply from April 2019 but it won’t be compulsory.
Property Landlord or a small business trading below the VAT threshold
Then you will join MTD from April 2020 (instead of the original date of April 2018). You do however have the option to join MTD earlier should you wish to.
Gross income of less than £10,000
The exemption threshold for complying with MTD still holds. Landlords and unincorporated businesses (sole traders or partnerships) with a gross income of less than £10,000 will be exempt from the quarterly reporting requirements.
Taxpayers who for any reason (including age, disability or location) are not reasonably able to use electronic communications or keep electronic records are exempt from MTD reporting.
What do these changes mean for me?
A two year extension in having to comply with MTD for those earning profits between £10,000 (the minimum MTD threshold) and the VAT threshold of £85,000, will be a welcome relief to many but my advice would be to use this time wisely:
1 – Keep abreast of MTD developments (and you can sign up to my newsletter here)
2 – If you are not keeping up with your bookkeeping on a regular basis, try and adopt the mindset of “little but often”.
3 – Take little steps towards a digital goal by investigating your options
If you currently write up your business records manually, look to start familiarising yourself with Excel spreadsheets. Clear Books have recently come up with a free spread-sheet package which backs up your data in the cloud.
You’ll find so many more benefits to using online software than just basic recording of your income and expenses and I’ve blogged previously on this subject here. I am a huge fan of Xero and my clients who use Xero haven’t adopted the software because they have to but because it makes genuine business sense to do so.
Accounting software sounds scary!
Accounting software used to be scary but that’s because it was written for accountants. Nowadays most of the online packages are written for small business owners in mind – they are easy to use and very intuitive.
I always suggest a training session and set up by an accountant but most of my clients are up and running very quickly and manage all their bookkeeping themselves.
What about the cost?
If you are currently using Excel or writing your records up manually, then the cost of moving to online software is going to be a consideration. Surprisingly, a good online accounting system does not need to cost a fortune and monthly subscriptions can start from as little as £6 per month.
The bigger picture
Digital solutions are becoming the norm and most of us have already embraced banking, paying bills and interacting via online platforms. Digitalising the tax system is a natural fit for the digital age we now live in and we have little choice but to embrace it.
Ultimately, Making Tax Digital is going to involve more input (at least initially) from everyone but the sooner you start to become more efficient in your bookkeeping procedures and systems and the earlier you adopt a digital mindset, the easier the transition will be when it comes to crunch time in 2020. You still have two years and don’t forget that the government is still refining the MTD model in this timeframe.
Needing support in the transition from Excel recording to accounting software? Take a peep at how I can help you.
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Over to you
I hope this post has been helpful? Please do drop me a line in the box below if you have any questions. And, if you’ve enjoyed the post, I would be so grateful if you could consider sharing this post with other small business owners using the buttons below. Thank you.