What is Making Tax Digital?
Making Tax Digital (MTD) is a government initiative aimed at simplifying, modernising and streamlining the way businesses report their income, expenditure and taxes. It will ultimately mean the end of tax returns for millions across the UK with quarterly submissions being made to HMRC direct from your accounting software.
Who would Making Tax Digital apply to?
The first to be affected will be small businesses and individuals with a turnover above the VAT threshold, who will be required to keep digital records for VAT purposes from April 2019 with those under the threshold being impacted from April 2020.
The Good News
One of the main advantages of making tax digital for businesses is that it will lessen the annual chaos surrounding the tax returns. Aqua Digital Bookkeeping firmly believe there are some great benefits:
- De-stressing tax – Data will be submitted electronically every three months, which means no more panicking and cramming in twelve months of work at the end of your financial year.
- Less paperwork – Your accounting software will make an automatic record of the financial transactions of your business, the data is then validated and updated to HMRC each quarter.
- Fewer surprises – Because tax will be calculated quarterly, there’s far less chance of a potentially large bill building up at the end of the year. You’ll find out what your tax liability is every few months so you know where your business is and can proactively plan accordingly.
- More chances of lowering your bill through tax planning – Businesses that keep regular tabs on the tax they owe can make strategic tax decisions on the direction of their business. It’s always good practice to speak to a specialist Tax Advisor.
The Bad News
Having greater visibility of your tax situation and proactively managing your business finances can’t be a bad thing. For some businesses, however, there will be changes to manage. Here’s a few of the issues you may have with Making Tax Digital:
- More reporting deadlines – A single annual filing will be supplemented by four quarterly reports. However, these shouldn’t be nearly as intensive as there won’t be 12 months of transactions to process, and because much of the data-entry will be automated, there should be less effort involved.
- Compulsory use of technology – By Making Tax Digital, HMRC will require you to submit returns online, through online accounting software like Xero or Sage One. At present, they cannot accept spreadsheet entries.
- Loss of privacy – You may not be comfortable that some of your electronic transactions will be visible to HMRC, however you will be able to review the data and fix mistakes before it’s submitted.
Where To Next
User-friendly online accounting software like Xero can help you:
- automatically calculate the tax you owe (including VAT, income tax, and payroll tax)
- pull transaction data straight from your bank or your accounting software
- update your transactions daily, allowing you to stay on top of bank reconciliations
- create digital records of paper receipts just by capturing them on your mobile phone
- outsource to an online Bookkeeper which can significantly reduce your Accountancy fees
Change can often seem daunting, especially if it requires you to adopt new technology, however, filing quarterly tax returns could actually lessen your overall workload and stress levels. By updating your accounts more often, and having real-time dynamic data available, you’ll be able to respond faster to opportunities and threats in the business.
More information from HMRC can be found here : HMRC -Making Tax Digital