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There has been much discussion over previous years about the upcoming Making Tax Digital – the initial proposals were not popular with a lot of small businesses and the Government then pushed back the roll out and I think, at that stage, perhaps many people either put it out of their minds or are still not convinced it is really going to happen.

However, it is coming and the first stage of the ‘roll out’ takes effect from April 2019 where businesses who are VAT registered and with a turnover of above the VAT threshold (currently £85,000) will need to move from submitting one annual tax return to submitting quarterly returns through an accounting software that is Making Tax Digital compliant.

So what is Making Tax Digital? What does it mean for small businesses? What are the positives?  The legislation is here to stay and so we are choosing to take a positive approach and find the benefits for the small and medium sized businesses that we work with.

What is Making Tax Digital?

Making Tax Digital (known as MTD) is a Government initiative aimed at simplifying the way businesses report their income, expenditure and taxes.  The idea is that businesses will submit quarterly tax information to the HMRC instead of one annual tax return.

Who does this affect?

Well at this stage, all we definitely know is that from April 2019, all businesses who are VAT registered and with a turnover of above the VAT threshold (currently £85,000) will need to start to submit quarterly returns through an accounting software that is Making Tax Digital compliant.

If this description fits your business, you will want to find out whether your software provider is going to be developing their software to become Making Tax Digital compliant. So you are likely to fall into one of 3 camps;

  1. The software provider you use already has this in hand and is developing their software and so it won’t be a significant change to your bookkeeping arrangements for you.
  1. The software you use is an old version and you will need to upgrade your software with your software provider or you make take the opportunity to change your software provider completely.  Unfortunately, I have heard recent stories of some software companies contacting customers advising them that if they don’t upgrade their software with them (with a significant price attached to it), they will no longer be able to use their current software.
  1. If you don’t use a software currently or your software provider won’t be providing a Making Tax Digital compliant version, you will want to research software options and have this up and running ahead of April 2019.

So where are the positives in all of this?

There are understandably concerns about the additional burden these obligations will place on small businesses and especially since this follows many other requirements that have come before it that we are all endeavouring to adjust and respond to e.g. auto enrolment, GDPR etc.  There is also a fear that this will lead to the Government asking for tax to be paid quarterly instead of annually too.

However, in this blog, I wanted to focus on some positives coming out of this initiative.

  1. Increased efficiency – Over recent years, there have been some fantastic cloud based accounting softwares that have started to dominate the market and they have transformed how small businesses manage their business finances positively.   These include softwares such as Xero, Quickbooks Online, Freeagent, Kashflow etc.     It is anticipated that all of these new softwares will be developing their softwares to be Making Tax Digital compliant – Xero is a software we work with a lot and this software will definitely be MTD compliant and they also won’t be charging their clients to provide the upgrade.
    So for those businesses currently using a spreadsheet or an outdated software who are driven because of Making Tax Digital to move to one of these cloud based softwares, they will get actually get huge time and cost saving benefits of moving to one of these user friendly softwares.
  1. Better insights – By using a great software, it allows much better insights into the business on a regular basis.  Many of the softwares allow you to see how your own business is performing against the KPIs you have set for the business and you also don’t need to wait for month or quarter ends to see what is happening in your business.  The systems can be updated daily or weekly and on the go which means us business owners can be much more engaged with their financial data and on top of things.
  2. Easier to manage the workload – Rather than submitting a large bulk of 12 months of bookkeeping in one go to your accountant or doing this backlog yourself in one go, your bookkeeping will need to be done every 3 months and therefore this helps to spread the workload more evenly and avoid last minute panic.
  3. Less surprises – Because tax will be calculated quarterly, there’s a far less chance of the unexpected becoming a big problem for the business.  You’ll find out what your tax liability is every few months so you know what to expect rather than waiting for an annual figure to be calculated.  This will also help business owners to take advantage of more pro-active tax planning with the support of their accountants or tax advisers. 

So what do we do now?

Well, the practical arrangements of how this will all work are still to be fully outlined by the HMRC.  However, if you are a business that is currently at the VAT threshold and VAT registered and not using a software to do your bookkeeping which is going to be Making Tax Digital compliant, it is worth taking action now.  By this I mean, researching and deciding which software you are going to use, reviewing how your bookkeeping is done and putting in place a new way of working.  At the Bookkeeping Department, we can help you get started with this by;

  1. Providing you with a free 30 minute consultation to help you work through what your options are and what you need to do.  Please click here to our website where we provide more information on Making Tax Digital and you can contact us.
  2. Providing you with access to our free monthly webinars where we introduce and demonstrate Xero bookkeeping software which would enable you to see how the software works.  Xero is one of the softwares available which will be Making Tax Digital Compliant.  Here is the link to all of our events, including these free events.