As a small business owner, you’ve probably already heard about HMRC’s Making Tax Digital initiative which is due to start coming into force at the beginning of next month.
However, if this is the first you’ve heard of it, we’ve put together all the key points along with tips on what you should be doing.
What is Making Tax Digital?
Making Tax Digital is HMRC’s latest attempt to make your life more difficult. Actually, that’s not true at all. While you might have to put up with a bit of upheaval in the short-term, the change should make submitting your tax returns far simpler in the long-run.
In fact, the end goal is to do away with tax returns as we understand them altogether! Wouldn’t that be nice?
The idea behind Making Tax Digital is that businesses will store their bookkeeping records electronically and submit their returns to HMRC digitally. By doing this, HMRC hope to make tax administration in the UK more effective, more efficient and far simpler for taxpayers.
How will it work?
Rather than submitting one tax return a year, you’ll send HMRC summaries of your income and expenditure each quarter instead.
And as the name suggests, you won’t have to do this manually – you’ll be able to do it digitally using your accounting software.
All you have to do is keep your books up-to-date throughout the year, and review the information each quarter to make sure it’s accurate.
Why is this happening?
Remember those old TV adverts with the strapline “Tax doesn’t have to be taxing”. Well it is! Tax is a complex subject, and tax returns are notoriously prone to mistakes.
According to HMRC, avoidable mistakes in tax returns cost the Exchequer more than £9 billion a year. That’s a lot of money.
The government’s hoping that by streamlining the process and taking the opportunity for human error out of the equation, the country’s tax system can become one of the most advanced in the world.
What’s happening and when?
As you can probably understand, rolling out a whole new tax administration system isn’t going to be a simple job. And for that very reason, the timeline for the rollout has changed a number of times.
HMRC are starting with VAT before they move to include other forms of tax. Eventually, all tax will be submitted via Making Tax Digital.
At the moment, the timeline is as follows:
1st April 2019
VAT-registered businesses with a taxable turnover above £85,000 will need to start keeping their records digitally and using software to submit their returns. Some businesses are exempt from this deadline, however. The business that are exempt are:
- Not-for-profit organisations not set up as a company
- VAT divisions
- VAT groups
- Public sector entities who have to provide additional VAT information (like government departments and NHS Trusts)
- Local authorities
- Public corporations
- Traders based overseas
- Businesses who have to make payments on account
- and annual accounting scheme users
1st October 2019
After a six-month deferment, the businesses exempt from the 1st April deadline will have to start keeping their VAT records digitally and submitting.
The government announced this month that they won’t be mandating Making Tax Digital for any new taxes or businesses in 2020. They haven’t yet announced when this will be happening.
What do I need to do?
If you don’t already, it’s probably a good idea to start moving your bookkeeping to an online accounting platform.
Some of the most popular platforms are:
Each one works in a different way but they’re all essentially designed for people who aren’t qualified accountants; they’re designed to make it as simple as possible to file your records.
You should also ask your accountant if you’ve got any concerns, if they haven’t already kept you updated.