Making Tax Digital - what you need to know

Background to Making Tax Digital (MTD)

As you may know, the government believes that too many businesses struggle with getting their tax right, and ultimately this can result in lost tax revenue. The costs of monitoring, review and investigation of mistakes is significant. Latest government figures estimate that the tax gap, i.e. easily avoidable taxpayer mistakes, costs HMRC over £9 billion a year. 

The aim of MTD is to transform tax administration by 2020 so it is more effective, more efficient and simpler for taxpayers. 

What’s the rush?

MTD was first announced in December 2015 when the government published the Making Tax Digital Roadmap.  It met some criticism due to the pace and scale of what the Government was asking small businesses to undertake. 

In July 2017, following wide consultation, ministers announced a new timetable with the following deadlines:

1. All businesses (sole traders, companies, partnerships and LLPs) with a turnover above the current VAT threshold of £85,000 will have to keep digital records for VAT purposes only from 1 April 2019 onwards.  Note also that:

The Vat threshold of £85,000 will remain in force until 31 March 2020; and

The 1 April 2019 deadline means the first VAT return starting on or after 1 April 2019 will need to be submitted electronically.

2. From April 2020 at the earliest (once the government is happy that MTD for VAT has been shown to work), all businesses will be required to keep digital records and update HMRC quarterly for the purposes of income and corporation tax.

3. Businesses with a turnover of less than £85,000 will be have the option to use HMRC digital services but will not be required to until 2020.

Note that there may be a complete exemption from MTD for businesses with a turnover of less than £10,000, but this is unconfirmed.

2018 is well underway so small traders and businesses do not have long to prepare for the change. Moreover, the penalties for late filing and non-compliance will be severe, with a penalty points system coming into play. 

Practically speaking, what does MTD mean for me and my business?

In future, keeping only paper records or even basic non-connected electronic documents will not be a viable option as MTD becomes compulsory.  The long-term plan is for the numbers to flow directly from accounting software and software houses are gearing up for this.  Moving away from “bag and box” style or manual accounting may seem challenging, but it is worth thinking about now. 

At some point in the next two years, if you continue to run a business, you will need to start keeping digital records and you will need to find a way of providing these records to HMRC electronically. The best way to prepare for MTD is to adopt some secure, cloud based, digital accounting software in your business and learn how to use it.  Cloud based accounting software is surprisingly easy to use, and in the long run will make processing accounts for your business much easier. New technologies are being developed all the time, such as direct or third-party bank feeds, which allows the software to connect to your online banking and reduce administration.

At Bennett Brooks, we have partnered with Xero for bookkeeping and VAT and, combined with IRIS for accounts production and tax filing, we believe we have the best suite of products to offer the right level of service whatever size of business you run.

Why Xero?

Apart from the requirement to move to digital because of MTD, there are many other ways in which Xero could benefit your business:

Run your business on the go - Use Xero’s mobile app to reconcile, send invoices, create expense claims and view reports – from anywhere.

Get paid faster - Xero cloud accounting allows you to send online invoices to your customers – and get updated when they’re opened.

Create branded invoices and quotes - quickly generate and customise professional invoices and quotes, then send them by email.

Connect to your business bank account - automatically import and reconcile bank account transactions from the major UK banks.

Using innovative, cost effective apps which streamline your accounting and integrate seamlessly with Xero.

Are you ready to make the move?

If you are ready to make the move to cloud accounting, particularly if you fall within the VAT reporting deadline of April 2019, we can provide you with both the software and the training to get you ready for MTD.  Don’t hesitate to contact us on 0845 330 3200