https://www.xperience-group.com/news-item/making-tax-digital/
Making Tax Digital (MTD) is a government initiative for a digital revolution of the tax system. Before the reform comes into effect in 2020, here we explain the new MTD system in detail and highlight some of the key benefits.
In 2015 the government announced plans for a paperless tax system that requires most businesses, self-employed people and landlords to submit tax returns online quarterly, using approved software. Since then, digitalisation of tax records has been a subject to numerous consultations with a view to develop priorities and guidelines for the reform. A long-awaited report from the Treasury Select Committee was released on 14th January, revealing the next steps for the implementation, as well as the foundations of the new system:
You will no longer have to provide HMRC with information which they can obtain from your employers, banks, building societies and other Government departments. This will speed up collecting tax information.
Businesses will no longer have to wait until the end of the year to know how much tax they’re due to pay. This will reduce tax-due and repayments owed from accruing, improving cash flow management at the same time.
From April 2016, SME’s have access to their digital tax accounts. HMRC will send prompts and share advice through webchat and secure messaging from within each digital tax account.
By 2020 you will be able to see all of your tax information in one place – including all liabilities and entitlements – just like internet banking.
Every business with a turnover of more than £10,000 per year will need to use online accounting software to record income and expenses and every quarter will be required to submit a summary to HMRC online.
The government sees Making Tax Digital as a way to modernise the tax system and reduce the burden for taxpayers. Here are the benefits they see as a result of the reform:
The current tax system is often described by the Treasury as “complex, costly and time-consuming”. According to research, 45 per cent of sole traders spend five hours or more completing their tax return, and 22 per cent say they spend ten hours or more on their annual submission. Consequently, the Making Tax Digital initiative will considerably simplify the tax collection and reduce tedious form filling.
Businesses will be required to submit their accounts every quarter. While some may feel it’s a burden, in reality, this should allow you to be a lot more efficient and organised when it comes to your record-keeping and payments. Big tax bills can accumulate over the course of a year but when tax is calculated quarterly, things are far less likely to get out of hand and you can manage you cash flow better.
The new initiative will allow HMRC to collect and process your tax information in as close to real time as possible, stopping tax due or repayments owed from building up. Additionally, you will be able to get an instant view of your tax affairs and see how your tax is calculated as well as and benefit from secure payment options.
HMRC will send prompts and advice through secure messaging in the accounts, tailored to taxpayers’ specific needs and circumstances, giving advice on tax reliefs you might be missing out on — such as when you have a baby or approach retirement.
Under the original plan, small businesses and sole traders would have to start quarterly reporting from April 2017. This would become obligatory by 2020 when more than 50 million individuals and small businesses would get a secure, personalised digital tax account. From there, everyone would be able to register, file, pay and update information anywhere and anytime in the year – removing the need to fill in an annual tax return.
Due to the uncertainty following the general election, it has been announced making tax digital will be delayed. Under the new timetable:
• Businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records for VAT purposes only from April 2019.
• Remaining businesses will not be asked to keep digital records, or to update HMRC quarterly, until at least April 2020.
• Making Tax Digital will be available on a voluntary basis for small businesses, and for other taxes.
This means your business will now have more time to find the right software and evaluate processes suitable to comply with the new legislation.
To adhere to Making Tax Digital when it is launched, it is likely you will need to use a cloud-based accounting system to manage and update your tax information as well as make secure payments online. Depending on what package you choose, you will have the option of doing record keeping with your daily work, or on the go, through smartphone apps, for instance.
There is likely to be an app set up by HMRC or you can use an independent accounting software package. The government states “Most software providers will deliver any necessary updates to the software directly to the customer via a download, or automatically through cloud technology which delivers instant updates the next time a user goes online, minimising any activity required by the customer to ensure they are using the most recent version.”
By moving to cloud, aside from compliance, you will benefit from reduced manual data entry, access to real-time financial data, automatic backups and robust security, something we discussed here. There are already tools in place to facilitate this, including Pagasus and Sage 50c, that allow to manage your accounts online.
The government claims Making Tax Digital will make it far easier for all taxpayers to manage their tax affairs and pay the right tax at the right time. If you are just at the start of the journey to adopt the digital way of working, explore the tools to help you take a plunge.