Making Tax Digital – How does it affect your business?

Apr 13, 2017

Making Tax Digital is the initiative from HMRC to give the UK the most technologically advanced tax system in the world. Most people aren’t aware of Making Tax Digital but the changes are just around the corner. The biggest benefits of Making Tax Digital will fall to individual tax payers who will no longer need to submit detailed self assessment tax returns that state every item of income and deductable expenses. Making Tax Digital isn’t just about individuals, it’s about businesses too. If you run a business, Making Tax Digital might need fundamental changes to the way you manage your business book-keeping.

What is Making Tax Digital?

A couple of budgets ago the former Chancellor of the Exchequer, George Osborne, introduced the idea of getting rid of the need for many people to submit a tax return. The practical outcome of this is HMRC’s Making Tax Digital programme. So far HMRC have issued a white paper, have run a period of consultation, and issued formal responses to all the feedback they gathered. Soon we will find out the exact details of what will happen. What we know so far has been published on the HMRC website and you can take a look here .

Making Tax Digital comes into force for businesses gradually between now and 2020. To start with it is principally about income tax, but will eventually extend to also include corporation tax:

  • Starting during 2018 unincorporated businesses registered for VAT will need to submit tax information under the new arrangements
  • In 2019 Making Tax Digital extends to businesses below the VAT registration threshold
  • in 2020 The arrangements will extend to companies

UPDATE (29 April 2017): SINCE THE POST WAS WRITTEN THINGS HAVE CHANGED. THIS IS DUE TO THE SNAP UK GENERAL ELECTION. THE LAST ITEM TO BE RUSHED THROUGH PARLIAMENT BEFORE THE ELECTION WAS THE FINANCE BILL. THE PART OF THE BILL THAT WOULD HAVE MADE “MAKING TAX DIGITAL” LAW WAS REMOVED. THIS IS LIKELY TO DELAY THE PROPOSALS BY A YEAR, AND ITS UNLIKELY ANY BUSINESS WILL NEED TO FILE TAX DIGITALLY UNTIL 2019. http://www.telegraph.co.uk/news/2017/04/25/controversial-digital-tax-returns-delayed-dropped-finance-bill/

Lets take a look in a little more detail

Making Tax Digital and individuals

The main change will be the introduction of the Personal Tax Account. The Personal Tax Account will contain all the information that HMRC already have about your income. At the moment HMRC receive lots of information about you from other organisations. If HMRC request you to complete a tax return then you need to give all this information a second time. This can include, for example, employment information from your P60 and P11D; bank interest; gift aid donations. In the future, under Making Tax Digital, this information should appear automatically in your Personal Tax Account. All that you, the individual tax payer will need to do is add any extra information that isn’t already there. This might include overseas earnings, some dividend income, and other things that HMRC don’t already get from other parties.

If you are employed, or receiving a regular pension then this might sound like good news. If you are self-employed or run a small company then Making Tax Digital might be a little more onerous.

Making Tax Digital and businesses

You, or your accountant already submit your business taxes online. Making Tax Digital takes online submission much further. There will be two key changes:

  • Your accounting software will need to interface directly to HMRC’s systems. Tax information will be pulled directly from your accounting system rather than keyed into an online tax return.
  • HMRC will require information quarterly rather than annually. You won’t be able to prepare your annual accounts before you submit any Schedule D or Corporation Tax information.

At the time of writing, the exact details of how all this will work isn’t entirely clear. The precise arrangements for Making Tax Digital are gradually emerging from HMRC. We are told that though information will be supplied quarterly, HMRC has no plans for any changes to the timetable for paying taxes. Right now we can only guess at the ultimate reason for quarterly information.

What action do I need to take?

You will need to make sure your book-keeping complies with Making Tax Digital. Your book-keeping system will need to be able to talk to HMRC electronically and pass across the information HMRC requires every quarter. We are told that the current arrangements of keying information to an online form will no longer work. If you still use paper based record keeping in cash books or if you use a spreadsheet you will need to change what you are doing. If you have a old accounting package that doesn’t receive regular upgrades you may well need to change to a more up to date package.

The first indications from HMRC were that spreadsheets would be unacceptable in the future. HMRC have more recently indicated that they will supply a tool to extract information from a spreadsheet and pass it to the new Making Tax Digital HMRC systems. I’m not expecting to see anything thats particularly user friendly, and I can see a lot of work needed to convert existing spreadsheets to match the HMRC tool.

HMRC have also indicated that they might make a very basic accounts package available free. Its likely that this will be unsuitable for all but the most basic of businesses. My own view, based on my experience of HMRC’s real-time PAYE tools is that its likely to be great at providing the tax man with information but of little use to the business owner who needs good financial information and insight.

What accounting solution will I need?

If you use a modern cloud based accounting system such as Xero or Quickbooks you won’t need to worry. These systems will upgrade to become fully compliant with Making Tax Digital. Don’t expect this to be true of every accounting system. Some accounting software packages don’t deal with UK taxes very well at the moment. Freshbooks for example isn’t the choice of many UK businesses because it is developed in the USA and doesn’t handle UK VAT well. There is no evidence that a US centric supplier will put the effort into new UK requirements.

Freshbooks doesn't handle VAT  well so its unlikely to be a good choice for Making Tax Digital

Freshbooks doesn’t handle VAT well so its unlikely to be a good choice for Making Tax Digital

Ive moved from spreadsheets to Xero for my own book-keeping and for the family businesses I’m involved with. Xero is the first choice for many UK based practising accountants and has a huge UK footprint. You can check out my reasons for choosing Xero in a previous blogpost.

Surely this is going to be expensive?

Chances are you will need to deal with your accountant once a quarter rather than once a year. This might increase the cost, but he will have a better flow of regular information. This will simplify the interaction, so in practice it might not cost any more.

You might need new accounting software. This will cost money. Most cloud accounting packages come with a cost of around £20-£30 a month. There is benefit from using cloud accounting. Since I introduced Xero I’ve saved time and the focus of my own book-keeping has shifted from data input to generating information. I wrote about this in the last blog post. My personal view is that cloud accounting is worth the money regardless of what the tax man is about to throw at us.

If you are thinking it might be time to get ready ahead of the changes then make sure you try before you buy. Most good packages will come with a 30 day free trial, and I took advantage of this before I finally took the plunge and signed up for a monthly subscription to Xero. Take a good look at whats in the market, read some reviews, ask for advice. Then decide. There are lots of options to choose from, so get the one thats right for you. Personally I’ve got no regrets about Xero. Take a look and give it a trial run for yourself. Get ahead of the game and make sure your business is Making Tax Digital.

We discussed Making Tax Digital in episode 67 of The Next 100 Days Podcast

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