27 November 2018

Making Tax Digital – are you ready?

Many of you will have breathed a sigh of relief last summer when the Government scrapped – or at least delayed – its plans for quarterly tax returns. The controversial plans went down badly, particularly with small business owners and representative groups. Cost and extra burden were pressing concerns, despite HMRC's insistence that it would ‘not feel like filling out four returns'.

But the first step towards the Government's grand Making Tax Digital (MTD) plan is still going ahead and – much like Brexit – is now just around the corner. From April 2019, all businesses registered for VAT and above the threshold (around £85,000) must maintain and submit digital VAT records. Just last month, a pilot tranche of companies signed up to road test the new system.

Research from the Institute of Chartered Accountants in England and Wales found that 40% of businesses about to be affected aren't aware of MTD. HMRC plans to ramp up its communications over the winter to try and close this gap as the deadline draws near.

What does MTD do?
The current HMRC online VAT service will be ditched, and businesses must use MTD-compliant software instead. For those already using digital accounting packages such as QuickBooks, Crunch, Sage or Xero, there is little to worry about. VAT returns will be sent from the software straight to HMRC via an Application Programming Interface. The idea is that the ‘digital journey' will be seamless, with less manual effort required. These software companies have been working with HMRC to ensure their systems will be ready to go in April. But despite big increases in the proportion of businesses using online software in recent years, only 54% of VAT-registered businesses currently use it. 25% rely on paper-based records alone.

Why make tax digital?
For the Exchequer, the obvious potential benefit will be an increase in revenue. They currently estimate that mistakes in VAT returns cost the Government around £3bn per year. For taxpayers, the idea is that it will improve the quality of record keeping, reduce the amount of time spent gathering and inputting data, and allow users to see their tax balances before the year end, in real time.

What you need to do?
If you're already using online accounting software, the transition should be relatively straightforward. Providers should be updating you via their newsletters, and some have been running MTD webinars for their clients.

If you're using desktop accounting software, you need to check it's planning to be updated to be MTD compatible. If its old, it might not be updated, so you should consider moving to something more modern.

If you're using a paper-based system, manual records or spreadsheets, then consider moving over to online accounting software.

It's not over yet
The next phase, in April 2020, will see voluntarily VAT registered (below threshold) businesses required to move over to the new system. Then there's talk of moving over to an entirely digital system for Income Tax and Corporation Tax too, as the UK aims to be one of the most digitally advanced tax systems in the world.