What is ‘Making Tax Digital’ anyway?

What is ‘Making Tax Digital’ anyway?

I read recently that almost a quarter of UK businesses haven’t heard of Making Tax Digital (MTD).

What’s more, 66% of the businesses surveyed only know a handful of details about the programme, or simply recognised the name, while 25% of those aware of MTD have made absolutely no preparations.

So, I’m here to set the record straight and explain Making Tax Digital, why it’s a good thing for your business, and what you need to do to get ready for it.

Why is tax going digital?

For the 25% of you unfamiliar with MTD: From April 2019, businesses above the VAT threshold will be required to set up and use a digital tax account, filing their returns online once per quarter.

HMRC has given us four reasons for Making Tax Digital:

  • Better use of information
  • Tax in real time
  • A single financial account
  • Interacting digitally with customers

Let’s look at those in a little more detail.

1. Better use of information

Whereas previously, you’d typically have to provide HMRC with the same personal details year upon year, Making Tax Digital will use your information better.

It will be gathered from other sources (such as employers, banks, building societies, or government departments) and you’ll always be able to log in, view, and update your details.

HMRC will use this information to tailor the service it provides, based on your individual circumstances.  

2. Tax in real time

You won’t have to wait until the year end to find out how much tax you owe once MTD is in full swing. HMRC will try to collect and process information affecting tax in as close to real time as possible, preventing errors and stopping tax due or repayments owed from building up.

3. A single financial account

At the moment, you can’t see a snapshot of your liabilities and entitlements all in one place. But with MTD, you’ll be able to log into a central account and view your personal tax situation. Not too dissimilar to what you do with your personal finances and online banking.

4. Interacting digitally with customers

“Your call is important to us…” Cue smooth jazz.

The days of being left on hold could be numbered. MTD will change how you communicate with HMRC, giving you access to advice and support via web chats and secure messaging. Ask and answer questions and send and receive information, all without giving up your valuable time being passed between any number of Revenue departments.

Why is Making Tax Digital a positive step change?

You might be put off by the idea of being made to use new technology. Or you might have concerns over more frequent reporting deadlines or privacy. But, in my mind, Making Tax Digital has the potential to positively change our approach to, and relationship with, tax.

For instance, returns will be filed once every three months, instead of once a year. Talk about reducing the stress surrounding tax!

Then there’s the fact that paperwork will be greatly minimised. Everything will be automatic and seamless, from your bank account to your cloud accounting software to HMRC.

And because your tax bill will be calculated quarterly, there’s less chance that you’ll be caught out by a massive liability at the end of the year.

However, from my point of view as an accountant, the major plus of Making Tax Digital is it gives me an opportunity to help you lower your tax bill via streamlined, cloud-enabled tax planning. Together, we can keep an eye on real-time numbers, potential cash flow obstacles, and strategic opportunities to minimise your liabilities.

So when is MTD happening?

 It’s already well underway! A live pilot scheme was rolled out earlier this year, with the following milestones slated for 2019 and 2020 respectively:

  • April 2019– If your business has a turnover above the VAT threshold, you’ll be required to keep digital records and file quarterly returns via your digital accounting software.
  • April 2020– Assuming the system is working as expected, HMRC will roll out MTD to a wider user base.

 

A word of warning

All being well (and assuming further developments aren’t delayed by Brexit), Making Tax Digital for VAT will go ahead as planned. However, while I’m feeling pretty positive about MTD as a concept, I’d be remiss if I didn’t offer a balanced counterpoint.

For this to work as imagined, it’s vitally important that HMRC get the technology aspect absolutely correct from the word go – and that’s a big ask. Any niggling problems could very quickly turn people against an idea full of merit, and a great opportunity could be missed.

Get ready for Making Tax Digital

I’m long enough in the tooth to have witnessed a number of UK tax admin changes. Not all of them have been improvements, but the impending introduction of Making Tax Digital could be an exciting development.

So, what’s my advice for preparing for the switch? Don’t delay; start today.

If you’re not already using a cloud-based accounting system such as Xero, QuickBooks Online, KashFlow, or ClearBooks, now’s the time to make that move. MTD shouldn’t be viewed as another HMRC obligation, but rather an opportunity to delve a bit deeper into your business’s numbers, and use technology to improve your decision making and grow your business.

Need some help getting started? Get in touch today to find out more.