A Guide to Making Tax Digital
There’s a good reason that you likely would have seen Making Tax Digital, otherwise known as MTD, appearing in the recent and not-so-recent U.K. news. That’s because there are major changes afoot in the U.K.’s tax system. And though you may have concerns, there’s really no reason to be worried.
In this short guide, we’ll visit the basics involved in MTD. We’ll also explain how the status quo of the paper-based system is going to see changes.
What is Making Tax Digital All About and Why Was it Introduced?
A government initiative, MTD was introduced to reform and also to modernise the current U.K. tax system. Those reforms are set to be finalised by 2020. The idea is that it will make it easier for businesses to report taxes. From April 2019, any business that has a turnover of greater than the VAT threshold of £85,000 is obliged to maintain a digital record. This digital record is updated automatically. It stores company data in a single location. Because this information is kept online the intention is that it will increase transparency while eliminating errors that are frequently associated with tax filing on paper. All businesses, as part of the initiative, will have admittance to an online tax account. It’s from this online tax account that tax information will be submitted on a quarterly basis to the HMRC.
This new approach means that annualised tax filing will be no more, making traditional making tax digital annual accounting a thing of the past.
What Changes Will MTD Bring About in Terms of How Things Are Done?
The aim of MTD is to completely restructure the U.K. tax system. This means that businesses must file quarterly tax reports as opposed to annual ones, and they must follow record maintenance practices, which will be the new standard.
Digital recordkeeping
Individuals and businesses that file with HMRC are now obliged to utilise digital tools rather than paper forms for record-keeping purposes. If there is a failure to maintain digital records, you could be penalised to the tune of up to £3,000. A more in-depth take on the various penalty scenarios and related fees can be found on the smallbusiness.co.uk website. Spreadsheets may be used, but they must be integrated with an accounting app.
Data submission every quarter
Not only does Making Tax Digital mean that there will no longer be paper accounting, but it also means there will no longer be any annual returns filing. Instead, filing will occur every three months, eliminating the need for making tax digital annual accounting
MTD Implementation
The implementation of MTD was published by HMRC as a timeline:
April 2018: The commencement of pilot testing.
April 2019: Any U.K. business with an annual turnover of £85,000 (the current VAT threshold) or more is now obliged to maintain digital records.
April 2020: The scope of MTD will be increased to include partners and sole traders that make an annual income of between £10,000 and £83,000.
The Benefits of Making Tax Digital
The key benefit of MTD for most is that it removes the confusion and errors that were inherent with the paper filing system. There are, though, other benefits, too:
Stress-free filing
Because tax data must be filed every quarter, there’s no longer the requirement to pack an entire 12 months of data in one fell swoop. This, in turn, means that the risk of error is reduced.
Tax in real-time
As they alter, you will have a view that is in real-time and continuous of any tax liabilities you have. What this means is there’s now no requirement to wait patiently until tax year-end to only then find out what you owe. Thus, it should be easier to set aside the money you need to pay off your taxes rather than playing something of a guessing game.
Paperless
Since there is now a mandate to file returns online, software is needed to do so. That may not sound like a good thing, but it actually is. It means that the software will automatically detect mistakes as they occur. So there’s no longer the requirement to plough through a mass of receipts at year-end. If using software scares you, you can get the help of software accountants to help you to file your online tax return.
Tax information on any device
You can access your tax information at any time and from anywhere you wish. Use your laptop, your smartphone, or your tablet to log into your account in order to view or to edit data.
Are There Any Challenges With Making Tax Digital?
MTD comes with a good array of benefits, but there are also some issues:
Privacy
Some people are not entirely comfortable with MTD because of the lack of privacy. Your bank data and some online transactions you make are visible to HMRC. Nevertheless, there is, in fact, added protection over and above the paper tax filing system and it is more secure by default. Further, it’s easier to see what actions have been carried out and by whom because there’s now an electronically-captured audit trail of all transactions.
Technology
The submission of returns online means that business owners must use software to manage their accounts. Most U.K. businesses are still utilising paper accounting. As such, many business owners that are not quite so tech-savvy are up in arms, as you can imagine. This is not to say that all accounting software is only for tech-savvy folks. Some accounting apps are highly intuitive and easy to grasp, even for the more technophobe among us.
Deadlines
Quarterly returns are a good thing in one way: It helps to reduce or even eliminate errors in your tax return. However, it’s not all good news because it also means there are additional deadlines to meet as well as additional submissions to make. Then again, you do have an awareness of the amount of tax you owe. So it’s more a matter of you can’t have it all ways.
With the introduction of new technologies, the world of accounting is constantly evolving. The introduction of Making Tax Digital certainly helps to speed up the process.
While MTD drastically alters how the U.K. tax system functions, for most people, there’s no doubt that the benefits certainly outweigh the inconveniences that will likely occur from time to time. And, again, if using software to file your tax return is nothing short of a nightmare concern for you, there are good software accountants that will lift the burden from your shoulders and help ease your nerves. If you would like more information on any of our services, please get in touch and one of our friendly team will get back to you.
