Don’t dread Making Tax Digital, despite its obvious boon for HMRC
Maybe it’s the start of a new financial year that’s to blame but, whatever the reason for our optimism, we don’t buy some of the warnings that Making Tax Digital – in force since Monday -- means more expenses and red tape for contractors, writes Lee Murphy, chief executive of cloud bookkeeping software Pandle.
We say ‘in force’ but MTD isn’t live for everyone. The current requirement only affects VAT-registered business generating more than £85k, meaning that from this week such businesses, extending to limited companies and sole traders, must keep digital records and submit VAT returns online using MTD-compliant software. In practice however, this means affected businesses will need to submit digitally at the time of their first return. For the majority of businesses, which file VAT quarterly, this won’t be until August at the earliest.
Are you affected by MTD this year, or next?
Nobody likes to be forced into anything, and perhaps that explains some of the ill-feeling towards the scheme. But we believe the digital switchover going on about now (we presume not everyone was ready on April 1st based on the reports of low awareness levels), should pass without a hitch. If you’re a contractor who’s currently unaffected, you will want the transition for your affected colleagues to be seamless.
That’s because you too will likely be required to file online returns shortly. In fact, MTD will next be compulsory for VAT-registered businesses with a taxable turnover below £85,000 (the VAT threshold), but no commencement date has yet been set. Income and corporation tax reporting will also move online in the near future but not next year, as a delay from next year's commencement was announced at Spring Statement 2019. Whenever you make it, the jump to digital does have cost implications of course, but the whole thing will be much more of a breeze if you’re already using a cloud software provider or platform for your accounting.
We’d go as far as to say that there ought to be hardly any major hiccups for these contractors as they will automatically be moved onto the new system. That’s either because the software they’re familiar with is MTD-compliant already -- they just didn’t realise it, or thanks to ‘bridging’ software. They’ll also be a less steep learning curve when it comes to what to press and when, than there will be for contractors who use spreadsheets.
In time however, even these contractors will – we wager – become happy to park their paperwork. My message if you are still maintaining your accounting with offline files is clear – there is nothing to fear from going digital. Why? Well, try these four:
1. Being more ‘in the know’
If, like many small business owners, you struggle to keep up-to-date with your taxes, then MTD will propel you to take note of your liabilities.
As your tax bill will be available in real-time, you won’t need to wait until the end of the year to discover how much you owe. Having a clear, non-yesteryear understanding of your tax bill gives you a better understanding of your company finances, which can help enormously when it comes to cashflow, dividends, and credit matters. Making informed decisions to help you grow or just be more profitable is a major advantage.
2. No more domino effect
When filing your annual return, one small error made in the middle of the year can result in larger discrepancies over time. They can be disruptive and costly, often hiding away until the damage is done. Even the taxman, who might benefit from earning penalty revenue from such mistakes, isn’t keen. That’s why he’s promised to very soon respond to his bid to simplify the process of amending a return where a mistake has been made. Even minor errors cost HMRC millions in lost revenue every year, and the new quarterly system is designed to fix the system, picking up on mistakes as they arise.
3. Tell the taxman less
Instead of having to gather all your paperwork in one place, you will no longer need to give the taxman information that he can get from other sources, such as the bank. The result will hopefully be that you spend less time on paperwork and more time on your work. That said, you will need to make sure you keep your bank details up-to-date.
4. A helping hand
Most online accounting software today can help with a range of admin tasks including VAT filing, with a few having ‘bells and whistles’ to even assist with banking and cashflow forecasting. So if you are someone whose clients don’t pay on time, you can use software to automatically send out reminder notices, which is ideal if you’re a one-person operation.
There’s no doubt MTD is going to boost HMRC. Simply by making it easier for your outfit to pay, the Revenue believes it can collect an extra £1.2billion in revenue by 2023/24, and in the first year alone it is expected generate £610 million.
Don’t let this put you off. On the contrary, do what HMRC says and that’s to claim the cost of your MTD software as a business expense. Then, the quibbles about how much MTD is going to set you back (the FSB estimates £564 versus the official estimate of £280 initially as a one-off cost followed by an average of £31 a year) can be largely ignored. Maybe this ability to recover MTD’s costs is the real reason behind us not sharing the pessimistic outlook about what digital tax accounts are going to mean for you and your business!