Making Tax Digital (MTD) in your business

Firstly, we know that change can often be unsettling, especially if it requires you to adopt new technology. However, quarterly tax filing could lessen your workload and by updating your accounts more often, you’ll be able to react faster to opportunities and threats in the business. The Footprints Team are here to support you and your business through the imminent changes to the tax digital system.

So, what’s happening?

Basically, HMRC is bringing an end to the tax return!  Their plan is to move us all to a fully digital tax system by 2020.  As experts in Intuit QuickBooks Online, the Footprints Team can assist you with transferring your manual accounting system to a fully automated, online system.  However, if you already use an online system, we can work with you on getting you up to speed.

What are the timings?

To give us time to adapt, HMRC is introducing making tax digital in stages.

2018/19 – Self-employed and unincorporated landlords with net turnover above £85,000 will be required to record their business-related transactions digitally using MTD-compliant software and to update HMRC on a quarterly basis for income tax and National Insurance obligations.

2019/20 – All VAT registered businesses, whether they are filing quarterly updates or not will be required to file VAT returns using tax digital compliant software. In addition, self-employed and unincorporated landlords with net turnover below £85,000 and above £10,000 will be required to record their business-related transactions digitally using MTD-compliant software and to update HMRC on a quarterly basis for income tax and National Insurance obligations.

2020/21 – Companies (including incorporated landlords) and complex partnerships will be required to record their business-related transactions digitally using making tax digital-compliant software and to update HMRC on a quarterly basis for income tax and National Insurance.

Why is Making Tax Digital happening?

By ‘Making Tax Digital’ the HMRC are saying:

• there will be less form filling.
• everyone will be up to date on their accounts.
• deadlines will not be missed as the system will operate in ‘real time’.
• no unnecessary penalties and fines.
• no more debt because of penalties and fines.
• eradicate errors and therefore nothing being carried over from one tax year to the next.
• taxpayers have immediate access to their digital accounts.

How can Making Tax Digital benefit my business?

One of the main advantages of making tax digital in your business is that it will lessen the sometimes-chaotic processes surrounding tax returns… Here’s why!

De-stressing tax – You’ll submit tax data every three months, which means you can forget about cramming twelve months of work at the end of your financial year.

Far less paperwork – Computer software will make an automatic record of money coming into and going out of your business. You (or your tax advisor) will just check the data and update it to HMRC each quarter.

Fewer surprises – Tax will be calculated quarterly so there’s far less chance of a big bill building up. You’ll find out what your tax liability is every few months, so nothing gets out of hand.  This will also assist your business with cash flow as avoiding those larger lump sums at the end of the year.

A chance to lower your tax bill through tax planning – Businesses that keep regular tabs on the tax they owe can make strategic decisions to lower their bill.  You might make more retirement contributions or reinvest in the business, for example.

Things to think about!

There’s not much wrong with gaining greater visibility of your tax situation. For some businesses, however, there will be changes to manage. Here’s a summary of the issues you may have with making tax digital:

Compulsory use of technology – By making tax digital for businesses, the HMRC requires you (or your tax advisor) to submit returns online, through either an HMRC app or online accounting software.  We recommend Quickbooks Online but there are many of software applications out there.

More reporting deadlines – While VAT returns are already submitted quarterly, income tax and corporation tax aren’t.  After MTD takes effect, the single annual filing for income tax and corporation tax will be supplemented by four quarterly reports.

Loss of privacy – You may not be comfortable that some of your electronic transactions will be visible to HMRC but you will be able to review the data and fix mistakes before submission.

How come I don’t have to do paperwork?

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 like Quickbooks Online, you’ll have far less work to do.

Do you need an accountant?

Not for making tax digital. You can figure out your obligations and make your submissions on your own.  However, a good accountant will make the transition much easier for you, because they will:

• know the HMRC plan for making tax digital (including the implementation schedule)
• be familiar with accounting software that simplifies making tax digital for businesses
• be able to help you with tax planning – a strategy to help legally reduce the tax you pay.

If you already have an accountant

Making tax digital may mean you see your advisor more often because they’ll be doing quarterly reports. Those reports will typically be faster and easier to prepare than your old annual returns – so you’ll have shorter, more frequent bursts of activity.  The regular contact will allow your accountant to learn your business better. Use the opportunity to get more advice from them. There are many services they can provide besides tax.

Do I have to buy software?

You won’t be required to get software but HMRC encourages it. If you take this approach, make sure it’s online accounting software. Desktop software hasn’t traditionally been able to submit tax online.

Quickbooks Online accounting software is designed to be user-friendly and it can also:

• automatically calculate the tax you owe (including VAT and payroll tax).
• update your transactions every day, allowing you to stay on top of bank reconciliation.
• create digital records of paper receipts just by photographing them with your mobile phone.

What is my next step?

Firstly, try not to think of making tax digital as just another obligation. This is your opportunity to regularly check income, expenses and profit in your business – which will help you make better decisions and take control of your business.

Figure out when you have to make your tax digital – You can make your tax digital right now if you like, and there’s no reason to wait until the last possible moment to do it.  You do need to know when it will become compulsory for your business, so you know the dates you are working with. See the details above or go to the government guidance by following this link.  

If you need further advice, please contact Julie Robinson [email protected] or any of the Footprints Team on 0114 248 8764.  Alternatively, take a look at our website www.footprintsaccountancy.com for details of our next QuickBooks Online courses.

Remember – Making tax digital could be good for your business!

…and don’t forget, accounting software is tax deductible.