The government has faced a huge amount of criticism for announcing that its new Making Tax Digital (MTD) system is to be launched just three days after Brexit. As if the uncertainty surrounding leaving the EU wasn’t bad enough, businesses will have to deal with a huge change to their tax affairs while planning for the unknown.
This has led the House of Lords to draught plans to put the Making Tax Digital system on hold. They say that millions of small businesses are unprepared for the change. But until there is confirmation that this is going to happen, small businesses need to be prepared for the new system.
Essentially, by April 2020, all businesses and taxpayers who use the self-assessment system will have to adhere to the new MTD rules. The House of Lords are asking for the scheme to be delayed by a year, and figures such as 40% of small businesses not having heard of the scheme are ringing alarm bells. But as you know all too well, there are no guarantees and if you fail to prepare then you are preparing to fail. So, you need to know how the MTD scheme could affect your business.
What is MTD and how is it going to affect your business?
Making Tax Digital is being described as ‘part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs’. It’s all part of their grand plan to make all tax and records digital from a certain point. All tax affairs will need to be filed online using software that is compatible with the HMRC system.
The ultimate aim of this is to reduce the tax gap, or the difference between what should be collected and what actually is each year. As it is believed a lot of this difference is due to mistakes in tax returns, this new system aims to eliminate much of the scope for error. Tax and VAT figures will be updated online throughout the year, making it easy to complete your end of year assessment.
The new plan affects anyone who pays income tax through self-assessment or anyone who files a tax return. For the first year it will affect anyone with a turnover of more than £85,000.
This will mean that you will need to keep track of your invoices and start carrying out all your affairs in a digital way. This will mean investing in compatible software or at least paying someone to do this for you. And unless you are eligible for a deferment, then you will have to make your payments and conduct your tax affairs in this way from next year – if you meet the criteria. At the moment it is a voluntary tax scheme but will become mandatory from next year, unless this postponement happens.
How to prepare for Making Tax Digital
There are a number of key ways that you can prepare for the coming of MTD in order to reduce the impact on your business.
Understanding the timeline
The official deadline for any business with a turnover above £85,000 is April 2019. However, in reality this means that your first tax submission after April must be submitted digitally. Tax submissions can be made monthly or quarterly, so this may give you a little extra time to get everything in order.
However, you should be thinking about what software can help comply with VAT registration requirements and payments. Regardless of the possible delay, going digital is going to happen at some point. So, it’s best to get everything ready now.
Stay up to date
MTD is a big change for many UK businesses. This has resulted in a huge amount of testing, support and due diligence. Delays or changes are possible, so keep your business up-to-date with what is going on.
Select the right software
Not using software to do your taxes will no longer be an option. So, you need to begin weighing up your options. Accounting software should be able to create digital records of paper receipts and automatically calculate the tax you owe. It should also update transactions every day and access transaction data straight from your invoicing software or bank.
Although change can be scary and MTD is coming at a very bad time, it is happening. So why not see it as a great opportunity for your business to get digital? MTD is being implemented to reduce the amount of paperwork and remove panic at the end of the tax year. MTD even gives you the potential to lower your bill.
As with Brexit, it’s still not clear exactly what’s going to happen. But unlike Brexit, MTD is definitely going to happen as planned at some point in the near future. And you can’t afford to put off getting yourself prepared for either. Take the four points above into consideration and start preparing for the new way of working that is coming. If you prepare ahead of the game, you can reduce stress and potentially pay less tax.
Perhaps the key decision you need to make is choosing the right software to be compatible with the system. If you have any doubts about what might work best, then it’s worth getting help from an appropriate source. Various accounting software are compatible and may give you the chance to update the way you work. Rather than seeing MTD as a chore or something to be feared, embrace it and accept that this could be your chance to work smarter and better.
Even if you are one of the 40% that currently has no idea about MTD, don’t panic. A few good decisions now could set you up for better business for decades to come. So, don’t wait for a delay, start making your preparations now.