blow abbott chartered accountants Making Tax Digital A roadmap for small businesses www.blowabbott.com
Index Page What is Making Tax Digital? 3 When is it happening? 4 What are the upsides and downsides? 5-6 Making a start 7 Your questions answered 8 www.blowabbott.com 2
What is Making Tax Digital? Making Tax Digital (MTD) is one of the biggest changes to affect UK businesses in many years. The government initiative will revolutionise the UK tax system and ultimately bring an end to self-assessment. This will mean that by 2020 businesses and individual tax payers can access their tax affairs online via digital tax accounts The main purpose of MTD is to make tax administration more effective, efficient and easier for tax payers, by moving away from paper and desktop based systems to a fully digital tax system that will also reduce administrative overheads for HMRC. For businesses, the biggest change is that it is a move away from only filing tax information annually; instead businesses will submit tax information such as revenue and expenses every three months (quarterly). Although HMRC is keen to use the terminology real time to describe the new process of continuous reporting, the reality is that you will eventually you will be required to submit your financial figures eventually every quarter, plus year end. This will be managed via a digital tax account and some information will flow automatically into your digital account including some bank details and information from other government departments. Businesses will be required to check and supplement this information every quarter. If you are a VAT registered business already, you will be familiar with this way of working due to the move to online VAT filing of recent years. The impact on small businesses This new initiative is applicable to all businesses, although initially it is focussing on VAT registered businesses with a turnover over 85,000. The government intention is that it will roll out across the board, although the timetable for this roll out has not been announced. For businesses that currently use simple bookkeeping systems or non-cloud accountancy packages, this is a daunting prospect. What is important to remember, however, is that MTD is about increasing efficiency and, in the long run, this heralds an approach to accountancy that will bring many benefits to all businesses. www.blowabbott.com 3
When is it happening? Businesses agree that digitising the tax system is the right direction of travel. However, many have been worried about the scope and pace of reforms. We have listened very carefully to their concerns and are making changes so that we can bring the tax system into the digital age in a way that is right for all businesses. Mel Stride, Financial Secretary to the Treasury and Paymaster General The timeline for MTD for the smaller businesses has been relaxed following a backlash from parliament and the business community. The latest timetable is: From April 2019, quarterly reporting is: Mandatory for VAT for all VAT registered business with a turnover above the VAT registration threshold ( 85,000) Optional for VAT registered businesses with a turnover below the VAT registration threshold ( 85,000) From April 2020 (at the earliest), quarterly reporting is: Mandatory for income tax and corporate tax (as appropriate) for all businesses (including landlords) with a turnover over the VAT registration threshold ( 85,000). Optional for businesses (including landlords) with a turnover below the VAT registration threshold ( 85,000). This means that businesses and landlords with a turnover below the VAT threshold ( 85,000) will be able to choose when to move to the new digital system. As VAT is already required to be submitted quarterly, it means that no business will be required to provide information to HMRC more regularly than they already do until 2020. A small pilot is already underway with a larger, live pilot due to start in Spring 2018. This will allow for well over a year of testing before any business are mandated to use the system. www.blowabbott.com 4
What are the upsides and downsides of MTD? The benefits One of the main advantages of Making Tax Digital for businesses is that it will reduce the chaos that often surrounds annual tax returns. De-stressing tax You will submit tax information every 3 months, rather than cramming 12 months of work into the end of your financial year. Less paperwork Using computer software, you can automatically record money coming in and out of the business. You, (or your tax advisor) will just check the data and update if necessary before sending to HMRC every quarter. Although more regular, there will be less paperwork and admin in the long run. Few surprises Your end of year tax bill can come as a shock if you only reconcile everything once a year. Because your tax will be calculated quarterly, with your submissions, there is far less chance of an unexpected bill as you will know what your tax liability is, every 3 months. Better opportunities for tax planning Having a better idea of your tax liabilities throughout the year, means there are more opportunities for tax planning and making strategic decisions to lower your tax bill. You might make more pension contributions, or reinvest in the business for example. Making Tax Digital is the first step on a road to harnessing the power of real time financial data to provide a holistic view of your tax affairs. For your accountant and financial advisor, it will allow them to offer advice based on up-to-the-minute information, rather than just undertaking retrospective compliance tasks (such as self-assessment tax returns). www.blowabbott.com 5
The downsides There aren t any real downsides to the outcome of gaining better visibility of your tax situation, but for some companies, who were happy with the systems and processes they had in place, this can seem like change for change s sake! Forcing you down the road of technology Making tax Digital requires you, or your tax advisor, to submit returns online, through either an HMRC app or a cloud based accounting system. This may not be something you would have considered without this new initiative, so it can seem like HMRC are forcing you down a particular technology path. More reporting deadlines While VAT returns are already reported quarterly, your income and corporation tax returns are currently only annually, so this can feel like a whole load of extra work throughout the year. After MTD, your annual filing for income and tax will supplemented by four quarterly reports. Loss of privacy You may not be comfortable that some of your electronic transactions will be visible to HMRC. There is, however, the opportunity to review and amend any mistakes before submission. www.blowabbott.com 6
Making a start Although MTD will be another compliance obligation, unlike some other obligations where you can t really see the benefit for your business, this is a great opportunity to get on top of the key financial information about your business (and that can t be a bad thing!) The combination of regular reporting, plus the technology solutions such as Cloud Accounting that will enable this reporting, gives your business the ability to regularly check income, expenses and profits. This will help you to make important business decisions based on what is happening now, and not 18 months ago. Embrace the opportunity this gives you and make sure your business is in the best shape to take advantage of the changes. 3 steps to MTD 1) Work out when it applies to your business Find out what your business has to do and when. Although there is no need to wait, you can make your tax digital now if you would like. It may be better to start earlier, rather than leave it until it is compulsory for your business. 2) Consider online accounting software You don t have to use online accounting software to comply with MTD, but it will make things a whole lot easier. It is worth taking the time to look at options on Cloud Accountancy packages and seeing which best suits your business. Cloud Accounting software gives you access to other powerful tools that could benefit your business and streamline your processes over and above allowing you to make MTD submissions. It is worth talking to your accountant to see which software they are aligned with and would recommend. 3 Assess your accountancy support It is also time to assess your accountant and see whether they are tech-savvy enough to support you and help your business make tax digital. It is important that they are fully up to speed with the changes and also the technology that will allow you to make the most of this new way of managing your tax. www.blowabbott.com 7
Your questions answered New initiatives like this often generate more questions than they answer, so we have tried to cover the main queries and questions we have been receiving from our clients as we talk to them about Making Tax Digital and their business. What is a digital tax account? A digital tax account brings together each taxpayer s details in one place, just like an online bank account, so they can view their tax affairs in real-time, update their information, register for new services, see at-a-glance how their tax is calculated, and see a list of payment options. I am not VAT registered, am I exempt? If you are VAT registered and have a turnover over the VAT threshold ( 85,000) you will be obliged to keep digital records and make quarterly submissions. For businesses under this threshold, even if VAT registered, it is optional. The direction of movement, however, is towards digital records for all, so this will probably change going forward and at some point become applicable to all. I already submit my VAT return online, what will change? The vast majority of VAT registered businesses already report quarterly for VAT and submit online, so other than a technical change to the method of reporting, the data reported and frequency is unlikely to change. Will I need to keep more records? The aim of MTD is to simplify the UK tax system for everyone involved, so you will not need to keep any more records than you do currently. In fact, by using online accountancy solutions you should be able to reduce the amounts of records and processes by automating some processes such as invoice chasing and bank reconciliation, for example. www.blowabbott.com 8
How come the amount of paperwork will reduce? Electronic data about your business will go directly to HMRC from banks, building societies, and other government departments. You won t need to manually process this information for them. That s perhaps the biggest benefit of making tax digital for businesses. If you set up a smart tax and accounting system, you ll have far less work to do. How easy will it be to move from my current system to a Cloud Accounting platform? Although not essential, moving your accounting system to a Cloud based platform such as Xero will make MTD easier, plus give you a whole host of other benefits. If you have been using paper based systems, or software such as Sage on your PC, it can seem daunting to change but this is where working closely with an accountant, who understands Cloud accounting and can provide support, is essential. At Blow Abbott we have embraced Cloud based accounting and provide a number of tailored Cloud Accounting monthly packages that include software, support and business advice. We can migrate your current system onto the cloud within 3 weeks, causing minimal stress and disruption for your business. If you would like to talk to us about Making Tax Digital or Cloud Accounting, call on 01472 694 569. www.blowabbott.com 9
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