You may have seen the adverts for Making Tax Digital on the TV and online recently. It represents quite a significant change in the way that businesses do their accounts and their obligations.
In short, you will need to use Making Tax Digital compliant software to present your accounts to HMRC in the future.
Making Tax Digital is being rolled out in two separate stages:
- From April 2019, Making Tax Digital for VAT is being introduced. If your business currently has a turnover of more than £85,000 you will need to maintain digital records from now on and submit them to HMRC via compatible software. Some more complex businesses have until October 2019 to comply.
- From April 2020/2021, Making Tax Digital is set to be rolled out for income tax submissions, though this date is not yet set in stone. HMRC recently issued further advice that this was being slowed down because of several factors including the impact of Brexit.
Currently, if your business has a turnover below the VAT threshold, it won’t be affected by Making Tax Digital. It does pay, however, to make sure you are prepared for when it does come in for income tax submissions. If you have been doing your returns the old fashioned way and manually entering them on the HMRC site, you need to understand that this is going to change at some point.
The vast majority of VAT submissions are carried out online nowadays and there are some 2.67 million businesses that are registered for this. The problem is that nearly 90% of these returns are put in manually which can give rise to errors, something HMRC want to reduce. Making Tax Digital will ensure that your VAT returns are logged in appropriate software that can then transfer accurate data over to HMRC.
The key change here is that your business if it’s registered for VAT, will not be able to submit the return through the HMRC gateway as before. You will need to use complaint software which means handwritten records will be a thing of the past.
What You Need to Do: Making Tax Digital for VAT
If your business is registered for VAT and has a turnover that exceeds the threshold of £85,000, then you will need to comply and use compatible software for your accounts.
The information that you need to supply includes:
- The tax point or time of supply.
- The net value excluding VAT.
- The rate of VAT to be applied to the supply.
- Your business name and address and your VAT registration number as well as details of any VAT accounting schemes you might be using.
Spreadsheets such as Excel, which a lot of small businesses use at the moment, can be kept but the information needs to be entered into compatible software before being submitted to HMRC.
Making Tax Digital for VAT Exemptions
While you don’t have to use Making Tax Digital software if you are facing insolvency, have religious grounds or if HMRC has deemed you exempt because of disability, age or being in a remote location, this won’t apply to most businesses.
VAT Submissions and Penalties
There is no change in the times of submission for VAT. The only thing that has changed is the way the data is submitted.
Penalties up to £400 for not using Making Tax Digital for VAT where it is applicable are being introduced from April 2019 and businesses need to be aware of these.
What You Need to Do: Making Tax Digital for Income Tax
This is not due to come in until 2020 but you can join a pilot scheme if you currently self-assess or are a landlord. It’s important to prepare for this change beforehand and will again mean having access to a compatible software package.
There will be some new processes to get the hang of with income tax submissions. The most notable is that you will need to file several reports throughout the year rather than simply delivering your self-assessment by 31st January. You will also be able to voluntarily pay your tax as you go although this is still being worked out.
The Benefits of Making Tax Digital
While using accounting software that is compliant with HMRC systems is going to cost your business, most companies are offering a range of subscriptions to suit different types of customer.
If you already use accounting software, you need to check whether it is compliant. You can find a full list of compliant Making Tax Digital software here.
The benefits of Making Tax Digital include keeping accurate records for your business and the fact that you have up to date information on how you are performing at all times. The reduction in errors means that you are less likely to be subjected to fines.
If you still have concerns about how the governments new Making Tax Digital scheme will affect you and your business, get in touch today.