In the first part of this article we looked at some of the basics of Making Tax Digital, the new UK government initiative that will see an end to paper tax returns.
Here we delve deeper into how the initiative will actually affect your business and how you deal with your tax obligations.
How will your business tax returns look from now on – and what are the pluses and minuses of the changes?
Making Tax Digital: Benefiting The Majority?
The move to a digital tax system should come as welcome news to the many taxpayers who already choose to report much of their information to HMRC online.
The shift to digital should also help iron out some of the issues that sometimes make the current method of reporting information to HMRC frustrating for business owners.
Specifically, Making Tax Digital promises to end “bureaucratic form-filling” and to “remove the risk of missed deadlines and unnecessary penalties”.
For those who already get their accounts and tax returns arranged by accountants, very little should change. Modern accounting software such as Xero allows you to create your accounts as you go along, removing the nine months of waiting you traditionally got with non-digital systems.
Many Accountants (including ourselves) already offer packages that include all the necessary accounting and tax work on a monthly basis, essentially removing the burden from you. This will remain the same.
The End of the Tax Return With Making Tax Digital
One of the biggest implications for small business owners with Making Tax Digital is the eradication of the annual tax return.
By 2020, most businesses, self-employed people, and landlords will instead be required to keep track of their tax affairs digitally and to update HMRC at least quarterly via their digital tax accounts, or more often if they’d prefer.
HMRC has said that this doesn’t mean you’ll have to complete a full tax return four times a year; you’ll simply need to provide more regular updates online.
The introduction of a ‘real-time’ tax system means that, instead of reporting information on tax returns and paying liabilities long after the end of the tax year, you will be able to see a real-time view of your business tax affairs and liabilities through your digital accounts.
This should make it easier to understand how much tax you owe and to budget accordingly.
The Other Benefits of Making Tax Digital
Some of the main benefits of the initiative include:
- Know where you stand – with a full picture of your business’s tax affairs in your digital account all year round
- Save time – by having access to all your business’s tax info in a single place
- Save hassle – by managing all your business tax affairs online
- Plan and budget more effectively – with real-time calculation of how much tax you owe
Funnily enough, these are all benefit of the types of services that we provide already at Level Accountants in Bolton. For our clients, very little changes.
The Downside of Making Tax Digital
Though the idea to make tax digital is a good one, we believe that putting the onus onto the individual or small business is a mistake.
Most of the people we deal with come to us because they don’t know accounting and aren’t technically savvy. A good example would be tradespeople, who just want it done for them without hassle or having to worry about penalties.
Obviously we help them solve this but, if they managed their own accounts, we suspect that the quality of information provided to HMRC wouldn’t be very good.
And, knowing the way HMRC operates, chances are that this would result in fines, confusion, and a general waste of time for all concerned.
What Is Next For Your Business?
If Making Tax Digital applies to you, you’ll be required to use digital tools, such as software or apps, to keep records of your income and expenditure.
HMRC has said that spreadsheets can be used, as long as they meet Making Tax Digitals technical requirements. However, HMRC points out that spreadsheets will likely need to be combined with software for that to happen.
The question of how this could work will be explored in further detail in future posts.
HMRC has also stated that it won’t provide its own software, but will ensure that basic apps and software products are available for businesses with “the most straightforward affairs”. Many other businesses and their accountants, however, will choose to use more comprehensive commercial software.
Us? We will use Xero, as we do for all our customers. The Xero tools use the data from your day-to-day business activity to build an accurate picture of your business’s tax data, highlighting any possible errors and offering prompts for information that might otherwise be overlooked.
Once your software has compiled the relevant data, you or your accountant will then submit it directly to HMRC, either via computer or smartphone.
These two posts (see post 1) should answer many of your questions about Making Tax Digital. However, if you have further questions at this stage, your accountant should be happy to talk through your options with you. And if they don’t? Speak with us. We can easily migrate you to a service that takes care of everything.
HMRC has announced significant changes to the roll-out of its Making Tax Digital scheme, which was due to go live from April 2018.
The scope and timetable have now been pared back following feedback and concerns about the broad scope and short timescales from parliamentary bodies, businesses, the accounting profession and software companies, including Xero.
- Only businesses with a turnover above the VAT threshold will have to keep digital records and only for VAT purposes. They will only need to do so from 2019.
- Businesses will not be asked to keep digital records or update HMRC quarterly for other taxes until at least 2020, instead of 2018 as originally proposed.
- Small businesses will be able to file digitally on a voluntary basis for other taxes.