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Making Tax Digital explained for small businesses

First announced during Budget 2015, Making Tax Digital has changed since inception. Here's an up to date guide on how you'll be paying tax in the future

First announced during Budget 2015, Making Tax Digital is a government plan that will transform how businesses and people pay tax – with the hope of achieving a fully digitalised online tax system.

While this was initially estimated to happen by 2020, the government has acknowledged the need to potentially shift timelines based on testing – so businesses will “be able to move to keeping digital records for tax at a pace that is right for them”.

Once fully implemented, business owners will no longer be able to manually pay tax via pen, paper and post – a process that causes over £9bn worth of tax to be “lost” every year due to human error.

HMRC estimates that Making Tax Digital will contribute over £1bn to the Exchequer by 2022 to 2023.

What does Making Tax Digital mean for my business?

From April 2018, the government will begin live testing of the system which will allow some small business owners to keep online records of their income and expenditure for Income Tax purposes, and send quarterly updates to HMRC via their payment software or app if they so wish.

In order to facilitate this trial period, HMRC have approached accountancy bodies to ask their members, (i.e. accountants), to put themselves forward for taking part in the trial. As a result, businesses cannot put themselves forward for the pilot.

From April 2019, Making Tax Digital will force businesses (who are above the VAT registration threshold of £85,000) to keep all records necessary for VAT purposes online, and to provide their VAT return information to HMRC through compatible software.

Businesses already using Making Tax Digital-compliant software will see no change to their procedures during this period.

However, businesses that may presently keep their records in a cashbook, spreadsheet or non-MTD-compliant software, will need to make changes as the ability to login to HMRC's website and key-in the VAT return figures will be removed for businesses with a turnover greater than £85,000.

Making Tax Digital will also be voluntary available for other businesses for VAT, Income Tax and National Insurance contributions during this period.

Though not a legal requirement for many, it's envisioned that lots of these businesses will choose to use these new digital options from April 2019.

Jo Nockels, senior training and communications manager at TaxAssist Accountants, says:

“You don't need to wait for Making Tax Digital to apply to your business; you can voluntarily comply with Making Tax Digital for VAT from April 2019.

“And in fact, there are advantages to getting ahead, particularly if you have to change your bookkeeping processes and need time to get to grips with new software.

“Changing software mid-way during your accounting period will also be tricky. So to avoid any last-minute headaches, make sure you give yourself plenty of time to plan for Making Tax Digital.”

When will Making Tax Digital be fully implemented?

The government won't widen the scope of Making Tax Digital beyond VAT until the system has been shown to work – which won't be before April 2020 at least.

Dawn Register, tax partner at accountancy and business advisory firm BDO LLP, says:

“The government has stated that it will not widen the scope of Making Tax Digital for business beyond VAT before the system has been shown to work well. It is then expected that the full system will go live from April 2020, although clearly this date could slip given the Brexit timetable is always going to take priority for government.

“Therefore, many businesses will breathe a sigh of relief as this gives more time to plan, upgrade software as needed and focus on business in general. HMRC will use the intervening period to continue testing the system by expanding the current live pilot and carry out further consultations.

“The introduction of MTD in a more measured way is a welcome response to the many representations made by the professional bodies, other organisations and industry.”

Despite continuous change to the initiative since it was first announced, there is currently no change to the previous assessment that Making Tax Digital is not expected to impact on family formation, stability or breakdown.

What if I am exempt from paying tax online?

If a business owner is exempt from using any online services, due to a disability or because they live in a rural area with poor broadband, they do not have to meet the obligations of Making Tax Digital and can continue to submit information manually.

However, if a business owner with a disability already uses online services via assistive technology, then adhering to Making Tax Digital should not impose any additional costs on them.

NB: The onus is on a business to justify why they deserve an exemption, and HMRC can challenge their decision. As a result, there are very few businesses that are exempt from the current online filling requirements for VAT.

Specifically addressing the issue of businesses in rural areas with connectivity issues, Matt Herd, associate director at accountancy firm Duncan & Toplis, says:

“For small businesses in rural areas, the biggest change may be transferring from manual books and records to digital record keeping and online cloud-based software. Think about whether you’ll do this yourself or outsource it, and what software you’ll use to do this.

“From there, the jump to quarterly electronic VAT returns isn’t so large and most of the big software providers expect to be Making Tax Digital compliant or will be in time for April 2019.

“Businesses will need to check that they’re using the latest version, or speak to their provider for certainty. Some will offer initial consultations to start-up and small businesses for no charge.

“For really remote businesses, however, the biggest challenge might be getting online in the first place. The issue of rural connectivity is nothing new, but if this is the first step towards more business obligations moving online then clearly good broadband is going to become even more important than it already is.

“As Michael Gove mentioned at the National Farmers' Union (NFU) annual conference recently, this is a priority for the government after the UK leaves the EU.”

What are the business benefits of Making Tax Digital?

  • More transparency: Having an online tax account which they can access at anytime, business owners will be able to see what information HMRC holds on them, and as a result, won't waste time re-submitting it. As as well as being able to check their details are correct and up-to-date at any time, business owners will also be able to access more-tailored services.
  • Real time data: Business owners will no longer have to wait until the end of the year to find out how much tax they have to pay. With a digitalised tax system, HMRC will collect and process tax information in real time to help prevent errors and stop ‘tax due' or ‘repayments owed' building up.
  • Online banking: Much like the online account they have for their personal bank account, by 2020, business owners will be able to view their their liabilities and entitlements as a single financial account.
  • More flexibility: Being able to contact HMRC on its website via webchat and secure messaging, as well being able to receive and send data via whatever payment software they use, business owners can interact with HMRC at a time convenient to them.

Making Tax Digital case study

One small business owner already adhering to Making Tax Digital well ahead of schedule, is Simon Connor. The director of Crimson Publishing Services Limited (CPSL), a media sales firm, the business has been managing its tax affairs online for over two years now.

Using a leading accountancy software package, Connor says already playing by the rules of Making Tax Digital makes everything very straightforward and completely streamlined – and should benefit businesses on the whole.

“Everything happens in real time, you can send a VAT return to HMRC and receive a confirmation email immediately. This provides evidence that you’ve submitted everything on time and in good order.

“Everything is stored in the cloud too, so there’s no worry about any information going missing or important files being damaged or lost.”

Referencing features on his accountancy package, Connor lends particular praise to Making Tax Digital’s instant access credentials, which gives him the ability to manage his financial affairs at any moment, in real time.

“You can see the whole financial state of the company in one place. You can clearly see if you’re going to run into any late payments, and it will send alerts too to remind you. It’s essential for any small business owner that you’re always up-to-date with this kind of information.”

Granting online access to the firm’s accountants, managing all affairs digitally also allows key personnel within a business to act on any potential problems immediately, rather than having to wait for written confirmation.  

“It’s incredibly time efficient, and as it’s completely up-to-date, you can just spend half an hour each week logging into your account and reconciling anything that needs attention.”

As a small business owner, does he have any apprehensions about the introduction of Making Tax Digital?

“Not really, the old ways of communication between a business owner and HMRC could be very long. I’d recommend it to any business.”