What does ‘Make Tax Digital’ mean?
With so much of your lives already on a digital platform, it would be easy to consider tax as already being digital, especially as you already complete and file tax returns online. The HMRC governments new scheme wants you to report your income and gains in real time and the information to be digitally linked to HMRC. The first phase being introduced in April 2019. With less than a year until this is mandatory, there are some important pieces of information you need to know.
What is Phase One and will it affect your business?
VAT is the first element to be digitised, everyone who is VAT registered must use the making tax digital for business system from April 2019. Though there are some exemptions regarding VAT thresholds. This means you must submit your VAT returns digitally. Although to allow businesses time to adapt to this change there will be no financial penalties during the first 12 months.
The biggest change is what you will need to record in terms of VAT. The new scheme means you will be required to digitally record of all of your sales in terms of the VAT rating rather than the current requirement which is to keep of record of your total sales for VAT return.
Similar breakdowns are also required for purchases you make by VAT.
The importance of Compliant Making Tax Digital Software
With this new scheme, it will be necessary to obtain a software package for digital record keeping. It must keep a record of income and expenses and be able to send regular tax updates to HMRC. This software requirement may bring an unexpected expense, but the estimation is that these additional costs will be recuperated over time.
The reduction in paperwork and the transfer to a functional software package will help businesses by reducing the number of avoidable errors. Mistakes should be easily identified and rectified avoiding the potential financial penalties from HMRC at a later date.
Making Tax Digital timeline
- From April 2019: VAT reporting by all VAT registered businesses with turnover above the VAT threshold.
- From April 2020, at the earliest: All other taxes (income tax and corporation tax).
Making tax digital spreadsheets
The Government has confirmed that businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of MTD for business which will involve combining the spreadsheet with additional software to upload of data to HMRC.
The Good News?
The focus is to bring you the modern digital experience for your business that you have come to expect in today’s technological age.
This might all feel a bit daunting, adapting systems and making changes to your businesses way of recording the finances can pose difficulties and may present initial teething troubles but in the long term, it should improve financial systems.
Checklist of Things you can do
• Check VAT thresholds and how these apply to your business
• Check your current software for compliance
• Still in doubt? Ask an Accountant
Find out how we can help you prepare for making tax digital.
- Making Tax Digital for business
- Xero – Making Tax Digital RESOURCE CENTRE
- Making tax digital for businesses
- Getting ready for making tax digital