The government are introducing plans to make managing tax more straightforward and more accurate. Making Tax Digital (MTD) is at the forefront of these plans and it underpins HMRC’s ambition to become one of the most sophisticated tax administrations worldwide, and it is implementing changes to enable the tax system to become more effective, more efficient and simpler for taxpayers to accurately report.
MTD is a programme of work which sets about to move away from the use of paper in tax administration and towards digital records. It is already in place for UK VAT and the plans are for this to be implemented across self-employment, company and income tax.
VAT-registered businesses are already required to follow MTD regulations if they have a turnover of £85,000, which involves submitting their tax returns via accounting software and keeping records of their tax in a digital format.
The changes will see a significant overhaul in how tax is managed, and there are a number of advantages to the new system which will eventually impact all VAT-registered businesses as well as income tax. Maxing Tax Digital will eliminate the need for paperwork, which is not only more environmentally-friendly but also a great deal more practical for those filing tax and VAT returns. The system will also greatly improve accuracy when it comes to submitting tax returns, and it increases the accessibility of tax liability with tax data now available on mobile phones and tablet devices.
Digital tax isn’t a recent proposition. It is something which has slowly crept into the way we have managed tax for a number of years, and this has been highlighted by the rise in accounting software packages and their implementation within businesses of all sizes. Companies who are already familiar with these packages will find themselves well-equipped to cope with the changes to come, and it is advised that businesses who are yet to make such a transition consider doing the same in order to minimise the logistical challenges further down the line.
As well as the main practical benefits of MTD including eliminating the need for paper and improving the accuracy of tax administration, the new scheme could also provide great advantages to small businesses. The initial transition phase may be a logistical challenge for some companies, however once this initial hurdle is overcome it will take away a lot of the administrative financial tasks that are handled in-house and enable finance teams to focus their efforts elsewhere.
The changes will also enable businesses to access their tax data in real time, and all of this information will be available in the same place making it more accessible than ever before. There will also be less need for companies to communicate with HMRC as both parties will have full visibility of all of the relevant information, and the management team will be able to see a comprehensive overview of the companies performance on a continual basis.
How to Comply
Currently, only VAT-registered businesses with a taxable turnover above the vat threshold of £85,000 are required to follow Making Tax Digital guidelines. These changes came into effect in April 2019 and it is reported that over 1.4 million businesses signed up for MTD across the 12 months which followed.
VAT-registered businesses with a turnover which falls below the £85,000 threshold will be required to follow MTD for their first return from April 2022. In order to do this businesses are advised to make use of the range of software options available to manage the transition or to take over their tax administration altogether.
While Making Tax Digital may seem on the surface like a plan which benefits all parties, some businesses have already expressed concerns about how it could negatively impact the way in which they operate on a day to day basis. There are fears that businesses will be required to submit more information than they currently do within the current system for example, however this is not the case and the regularity with which information will be required will not change, nor will the volume.
Businesses are also worried that the potential costs they will incur as a result of MTD have not been factored into the decision to roll it out across the country, however the fact is that there are a myriad of cost-effective solutions available and that there is a likelihood that MTD will actually save businesses money in the long-term. There are 14 products currently available for free which will help companies to manage the transition and help improve their tax administration processes, and most businesses will be able to claim any additional costs incurred on software as a result of the changes against their tax. It is also worth noting that businesses who are unable to go digital will not be required to do so, which is another misconception that may not be completely obvious upon first glance of the new regulations.
What to Expect
Thus far, Making Tax Digital has been a resounding success from the perspective of HMRC. Within the first year of its introduction 4 million VAT returns were successfully submitted through MTD, with 83% of affected businesses signing up to the programme and 95% of those being said to have made their first return through the service on time.
Sole traders or landlords with an overall income in excess of £10,000 will also be required to follow MTD from April 2023, making 2023/2024 the first completely digital tax year.
The new system is likely to be a great benefit to small businesses, enabling the hours previously used on tax administration to be focused in other areas and increasing the visibility of tax-related data.
How we can Help
Making Tax Digital is one of the biggest changes to tax administration and vat registration processes in recent times. While we have tried to give a brief overview of the main points to consider when planning for MTD, it is natural to have concerns and queries when it comes to how it will impact you and your business in particular.
We work will businesses of all sizes to help them manage their finances, and our team of experts can help you to find out all your actions and responsibilities to ensure you are fully prepared for what is ahead. Contact us today by calling 0333 202 7198 or sending an email to [email protected].