These are turbulent times. Not only is the UK set to leave the EU on the 29th March (and currently without a deal) but just a few days later the Making Tax Digital (MTD) system will come into force for thousands of small and medium-sized businesses across the UK.
It applies to any business that meets the VAT threshold for registration. But there are concerns that many of the businesses to which MTD applies are underprepared for the changes that are coming.
A recent poll of MPs found that one in three of them believe that businesses are not prepared to deal with the changes regarding compulsory registration. Even though most MPs believe that the changes will have positive benefits for business in the long run, more needs to be done to help small enterprises make the transition.
The challenge for small business
The main challenges facing small businesses revolve around understanding how the system is going to work and evolving tax and accounting systems in order to meet the requirements. The system is designed to ultimately make it easier for businesses to submit their tax returns, removing the need for panic at the end of the financial year.
Rather than there being a mad rush to find and sort papers, invoices, receipts and more, everything will be filed automatically and submitted online. However, even though the future promises a pain-free tax process, the immediate concern is that switching over to the new system is going to be complicated and expensive.
The other main concern is that simply not enough has been done to inform businesses about what they need to do. Even though the system is just weeks away from being implemented, there are many small businesses that have yet to make any preparations, and even some who remain completely unaware of the changes that are coming.
The details of MTD
HMRC has decided to initially introduce MTD for VAT reporting only. At this stage this is only for businesses with VAT above the mandatory registration threshold of £85,000. What this means is that many of the smallest firms remain exempt from digital reporting in the short run. While this is also set to change in the future, for now, those that are required to report will need to make the necessary preparations over the next few weeks.
It has been increasingly important to bring the relevant sectors of business with the government on this policy journey. However, this has not necessarily been 100% effective, as mentioned above. Some have been left behind. This is something the government has been able to admit, which is why HMRC will be expanding its communication activity to increase awareness in the run up to the deadline. But is it too late for some businesses?
One of the key concerns is that many businesses just don’t understand the basics of the MTD scheme. This has led to numerous popular misconceptions about MTD that have led them down the wrong path or caused inactivity at this crucial time.
For example, some businesses seem to believe that the VAT threshold is going to be reduced in order to drag more companies into the MTD net. This is not currently the case, although there is set to be a review of the VAT threshold next year. But HMRC have said that any change to the threshold will be based on a number of complex factors, and not just to try and expand the MTD scheme.
Other businesses are under the impression that paper records, as used in their current system, are adequate as long as totals are recorded in the MTD online accounting system. This is not the case though, and every transaction must be recorded electronically. Just taking totals from your accounts is not enough to satisfy the MTD rules.
However, this does not mean that you will be required to scan and keep electronic copies of all documents and transactions online. You simply need to keep a record of any transaction on the MTD accounting system in real time, and then paper copies will be enough for your long-term records. Similarly, HMRC will not receive a copy of every transaction or details about all of your day-to-day operations. They will only be provided with a total figure for each of the nine boxes on the current VAT return. But in order to keep these up to date and use the system properly, you need to be updating it in real time as you go through the year.
To do all this you will need to use compatible software. You can find information about this on the relevant HMRC website pages. It may be the case that your existing accounting software programme is already suitable and making the transition will be very easy. However, if you do your accounts manually or use a simple spreadsheet, then this may not meet the requirements and you will need to take more action in the coming weeks.
The important thing is to remember not to panic. You still have plenty of time to make the changes if you act now. This is especially true if you enlist the help of professional accountants who understand the system and how it applies to your business. Here at Together Accounting, we are on hand to provide advice and assistance regarding what you need to do to comply with the new MTD scheme.
Whether that’s a complete tax overhaul or a few simple adjustments to ensure that you meet the right criteria, we can provide the advice and specialist knowledge you need to make all the deadlines. But the sooner you get in touch the better. Once your MTD system is in place, you can look forward to easy tax calculations and online accurate information about the state of your business. Get in touch to find out more about what we can do for you.