If you run a small business, you’ve no doubt heard about Making Tax Digital (MTD). It’s been a hot topic in the business and finance world since the planned changes were announced in the spring 2015 Budget. But the information being circulated can seem somewhat confusing and overwhelming. HMRC has recently published further guidance to help businesses understand their obligations under MTD. However, we still receive frequent queries from concerned business owners who are confused by the changes and are unsure of how to prepare. With the deadline for MTD rapidly approaching, we’ve put together our top pieces of tax advice to make sure you’re ready for April 1st.
Making Tax Digital is an HMRC initiative designed to make it easier for individuals and businesses to manage their taxes correctly. The aim of MTD is to reduce tax errors, which can be stressful and disruptive for all involved, and to make the process of paying tax much simpler. Everyone wants to get their tax right, but the latest tax gap figures show that many people find this difficult. In fact, tax mistakes cost the Exchequer over £9 billion a year.
MTD requires the majority of business owners to maintain digital records using compatible software. You can keep some paper documents if you prefer, but certain information, such as VAT-related transactions, must be recorded in digital form. Businesses will be expected to frequently update their records to remain compliant.
For the majority of individuals and businesses to whom MTD applies, April 1st is the date to remember. From this date, VAT goes digital for VAT-registered businesses above the £85k threshold. The exception is a small minority of VAT-registered businesses with more complex requirements. If you fall into this category, your obligations under MTD will be deferred until 1st October 2019.
From April 2020, phase 2 of MTD will be implemented. Any businesses that fell below the VAT threshold of £85k will be required to comply.
Phase 3 is likely to occur in 2020, where income and corporation tax will go digital for all businesses.
If you have a VAT-registered business with a taxable turnover above £85k, you will be required to use the MTD service to maintain your tax records digitally and use software to submit your VAT returns from 1 April 2019. Businesses that fall below this threshold may choose to use the MTD service but are not required to do so.
If you fail to comply with MTD, you may be liable for penalties. These can be significant, so if you’ve not prepared your business for April 1st, now’s the time to get organised.
Feeling confused? Overwhelmed? It’s a lot to take in and you’re busy running your business. You don’t have time to wade through government policy and set up new software.
If you’ve been putting off tackling the MTD issue, time is running out to make sure you and your business are ready to meet the requirements set out by HMRC. Change can be daunting, but MTD doesn’t have to be another tiresome obligation. It’s a great opportunity to streamline your accounting and improve the efficiency of your business. Keeping records and filing tax digitally will help you better monitor income, expenses and profit, which will allow you to make informed business decisions.
So what do you need to do to stay MTD compliant?
If your business has an obligation to file quarterly returns (such as VAT-registered businesses with a turnover above £85k), you must keep digital records. Digital records are records captured and held in an electronic/digital format and that can be viewed on a computer. This could include a digital copy of a paper record or an entry in an accounting system. You can maintain some paper records, but certain information must be stored digitally. Designatory data (business name, address, VAT number and VAT schemes used), supplies received (date of supply, value of supply including any non-reclaimable VAT, and amount of input VAT to be reclaimed) and your VAT account must be stored digitally.
HMRC has released a list of software developers it has been working with during the Making Tax Digital VAT pilot to ensure that software has the capability to be MTD compliant. To comply with MTD, you or your accountant will need software that lets you submit VAT returns, keep records of sales and purchases, send income tax updates and keep records of income and expenses. If you have an accountant, they’ll take care of this for you, as they must have the correct software in place before they sign you up for MTD.
Once you have entered data into your chosen software for maintaining digital records, any further transfer or modification of this data must be done using digital links. A digital link is an electronic or digital transfer of data between software programmes. It is not acceptable to simply “cut and paste” information.
The intention of MTD is not to trip people up but to make tax simpler and more efficient. Providing you read the guidelines and put some simple processes in place, you won’t fall foul of HMRC penalties. The best source of information to check you are fully compliant with MTD is HMRC. Its website explains the requirements outlined above in more detail and provides a range of support materials, including a stakeholder communications pack and a recently updated VAT notice.
If this still all feels rather overwhelming and you’d rather focus on making your business a success than digitising your tax records, why not ask for a little help? A qualified accountant will have a comprehensive understanding of your requirements under MTD and will be able to offer you the most up-to-date tax advice. They will identify compatible software for you and get your accounts in order, ensuring you are fully prepared for April 1st. A small investment in accountancy services now could save you from hefty penalties for non-compliance with MTD in the long run.
Need help preparing your business for Making Tax Digital? Book your free one-hour tax consultation today!