15 Feb Making Tax Digital –
What’s the craic?
So you must have heard about this by now, Making Tax Digital (MTD) begins on 1 April 2019 for VAT registered businesses with turnover above £85,000.
This article will give an insight into what this means for businesses and the benefits it brings.
What is Making Tax Digital?
It’s the new way HMRC want you to submit your data. Digitising tax is part of the government’s ambitious plans to make it easier for individuals and businesses to get their tax right and stay on top of their affairs.
There will be fundamental changes to the way the tax system works transforming tax administration to make it more effective, efficient and easier for taxpayers.
Why the change?
To put it frankly, there are two main reasons. Firstly, HMRC want your taxes sooner (each quarter for income tax and corporation tax is the long-term plan) and secondly to reduce the tax gap on errors made by taxpayers which cost the Exchequer over £9 billion a year.
The best way for HMRC to tackle this is to get you to file and pay more regularly and through a more robust digital system, hence MTD.
HMRC misses out on billions of pounds each year due to avoidable taxpayer mistakes, which is typically due to the way businesses keep records and submit returns. Many businesses are not using ‘joined up’ digital record keeping.
The theory is that by storing records and submitting digitally it will make the whole process much easier and free from error!
When is it happening?
The first phase of MTD is VAT which begins on 1 April 2019. Yes, less than 45 days away! This applies to VAT registered businesses with turnover above £85,000.
Businesses will need to keep digital records and submit VAT returns using compatible software.
The next stage of MTD will be for income tax and corporation tax, but that has been placed on hold until at least April 2020.
How will Making Tax Digital for VAT effect you?
This depends on how you currently prepare your records and submit your returns. If you prepare your records manually or on spreadsheets and submit your VAT return using HMRC online services, you will not be able to do this from 1 April 2019. You will instead be required to submit your return digitally using compatible software.
How do you prepare for MTD VAT?
First you will need to enrol to file through the new MTD platform. Then there are two types of compatible software to consider, cloud or bridging.
There are over 150 cloud software providers, market leaders are Xero, QuickBooks, and Sage plus around 40 bridging software providers. Bridging software creates a digital link between your spreadsheet and HMRC, used mainly by accountants.
If you are currently using an online cloud software then this puts you in a good position as the likelihood is the software you are using will be MTD compliant, but I would suggest you check with your provider, or alternatively you can confirm if your software supports MTD by visiting HMRCs website link below.
If you are still using excel spreadsheets or paper records, then this will need to be filed using bridging software unless of course you wanted to get on board with the cloud, but you better act fast as there will be an on-boarding process to consider.
MTD isn’t just going to benefit HMRC
I would say there are more pro’s than con’s in getting ready for MTD. There is so much more information available to you when using cloud accounting software as it is the hub of your business data.
You can do things like…
- Keep all your business records in one place and have multiple user access including your accountant.
- Connect your bank account up to the software to automatically import your bank transactions to automate data entry, be more efficient and prevent errors (no more chasing bank statements).
- Setup sales invoice templates to automate your invoicing and prevent error (automatically calculates VAT etc and puts your logo in the right place every time :).
- Access to real-time information easily through secure online platform on any device.
- Prepare your VAT return with the click of a button for review making it easier to record and file the return.
Once you have a good system in place you can do things like run regular VAT return reports to budget accordingly, run Profit and Loss reports to get real time snap shots of business performance, as well as clearly see the amounts due from your customers all of which help you keep control of your business.
We have seen our clients successfully move from spreadsheets to cloud software (Xero) and be pleasantly surprised by the instant benefits, such as recovering VAT on payments which had previously been missed, duplicate payments to landlords, recovering amounts due from customers which they thought had already been paid. It’s great to see our clients benefiting from technology whilst also being MTD ready.
Our recommendation is to embrace the cloud! Bridging software can be viewed as a temporary fix, unless your business is considered complex and a spreadsheet is required (in very rare cases). Embracing the cloud at this stage will also mean you are ready for MTD Corporation Tax in April 2020.
If you’re already using Xero to submit your VAT returns you have nothing to worry about. Xero will automatically upgrade the VAT functionality so you will be using MTD compatible software all in time for the 1 April 2019 deadline.
Getting ready for MTD isn’t as painful as it sounds! J2 Accounting can help you move to a digital accounting system to ensure you are compliant. We are Xero Certified partners and have a great track record of supporting businesses through this process.
Keep an eye out for more helpful articles. We practice what we preach and are a totally cloud based, paperless office and use Xero in our business.
By James Paoloni on 15 February 2019, founder of J2 Accounting.
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