You may have heard the term ‘Making Tax Digital’ or ‘MTD’ – but do you know what it is or what it means for you?
Making Tax Digital (often referred to as MTD) is part of the government’s plan to become one of the most digitally advanced tax administrators in the world. The aim is to improve efficiency, effectiveness and ease of compliance. HMRC are making it easier for businesses to stay on top of their day-to-day accounts.
The plan is to end paper returns and move everything online. Digital returns will mean more transparency and also more accurate returns as tax summaries will need to be submitted quarterly through software, giving HMRC an accurate view of your accounts.
When will these changes happen?
MTD will start with VAT returns. If you are a VAT registered business you will need to start filing your returns for VAT quarters starting on or after 1stApril 2019 through MTD compliant software.
The second phase will be Corporation Tax and Income Tax. This will affect all businesses, sole traders, partnerships and landlords with turnover (sales) between £10,000 and £85,000. This is currently due to begin in April 2020, but could be later.
If your turnover is under £10,000 then you will not be affected by MTD at all.
What does this mean for me?
Let’s start with the bad news and get it out the way, so we can then focus on the benefits!
Change! It’s a scary word, and not liked by many, but unfortunately things are changing, and you will need to make some changes:
- For a start HMRC will require you (or your tax advisor) to submit returns online through software. Many business owners are still using paper records, or Excel spreadsheets, but unfortunately these are not compatible with the new regulations.
- There will be more reporting deadlines for those of you not already submitting quarterly VAT returns. Everyone affected by MTD will need to start filing quarterly returns
- More information will be submitted to HMRC, therefore you may feel you have a loss of privacy and may not be comfortable that some of your electronic transactions will be visible to HMRC. You will though be able to review the information being filed and fix mistakes before you submit.
So now for the good news, I promise there is plenty!
Here at PPF we think MTD is a good thing for our clients, and businesses as a whole. It will force people to stay on top of their finances, which can only be a good thing – more visibility into what you are earning and the tax due. Here are more benefits with MTD:
- Yes you’ll submit every three months, but that will take away the stress of a whole years work at the end of the year, probably quite close to the deadline. Doing it in quarterly returns means you’ll only be doing 3 months at a time rather than 12 – less work, less scary to manage and less putting it off as it seems such a big job!
- Going digital will mean a lot less paperwork. For a start you will be able to keep digital copies of receipts, so you can throw away the original paper copies. Computer software and apps will make an automatic record of your income and outgoings – you (or your tax advisor) will just need to check the information and then upload to HMRC each quarter. No more boxes or carrier bags of receipts cluttering up your home!
- Quarterly returns will also mean your tax is calculated quarterly, so you’ll be able to keep on top of the tax you owe and be more organised. You will be able to put money away each month or quarter to ensure you have enough for the tax bill. No more panicking and trying to find the money days before the payment deadline.
- Quarterly reporting will also mean you have a more thorough picture of your business during the year. You will know how well you are doing and not have to wait to the end of the year (or sometimes even later) to see how much money you made that year. You’ll be able to keep track of your income and see your goals being met. It will also mean if you are a sole trader and you’re doing well you will be able to transfer your business to a limited company sooner, meaning you can make the most of the tax benefits in doing so.
- I’m hoping you’re already as on board with MTD as we are, but I have one last benefit to highlight. As you’ll be more on top of your finances during the year you’ll be able to make more strategic decisions to lower your tax bill – you’ll be able to make additional contributions to your pension, or make other investments during the year (i.e. buying the nice shiny laptop you’ve had your eye on!), which could lower your tax bill. These cannot be done after the year has ended!
On 20th March 2019 I was with Gary Turner, MD of Xero, on Nick Ferrari’s Breakfast Show on LBC to talk about Making Tax Digital and the effect it will have on small business owners
What do I need to do next?
My first piece of advice will be to start preparing now – do not leave it until the last minute. If you wish to make the submissions yourself then it’s time to start looking at MTD compliant software options. Xero have been named as one of the compliant offerings – see their recent blog: https://www.xero.com/blog/2018/07/hmrc-xero-mtd-software-supplier-list/
If you already use Xero to file your VAT returns (either directly yourself or via us or another accountant) then the great news is you are all set and ready to go. We have been lucky enough to be part of the beta trials with Xero and HMRC and we filed the second VAT return as part of these trials. You can read all about the trials and what we thought of the new Xero function here: https://www.xero.com/blog/2018/07/hear-from-the-accountants-who-have-tested-xeros-mtd-solution/
As a practice we are as ready for the coming changes as we can be.
All of our limited company packages are MTD compliant and already include quarterly reporting and tax estimates. We will be taking this one step further and filing these quarterly reports as and when required. For our VAT clients there will also be no changes as everything is already compliant, we will just be filing the returns in a slightly different way through Xero’s new function.
How much will MTD cost me?
Well the good news is if you’re already a PPF client (as I mentioned above), or you already use Xero then there will be no additional cost, hurrah!
If you currently use spreadsheets, a manual system or a non-compliant software then you will have the cost of the software you choose. For Xero the subscriptions start at just £10 per month plus VAT, with the most popular subscription level being £22 per month plus VAT. Your bookkeeper will also charge you to complete a conversion from your current system.
If you are currently using Sage or Quickbooks we are able to convert you to Xero for free thanks to MoveMyBooks and their relationship with Xero. Xero cover the cost to convert your current financial year and the previous year, and if more years are required these are charged at just £60 plus VAT per year.
PPF is able to assist with this transfer, and we are also able to help with converting from spreadsheets, manual books and other non compliant software. Depending on your business these conversion costs will start at £100 plus VAT. A full quotation can be given on request.
If you’d like more information on one of our MTD compliant packages please visit our Work With Us page to complete our quick questionnaire and arrange a discovery call with us.