In this, the second in our MTD series, we look at specialist software software solutions to MTD compliance and how they can help companies to make a smooth transition to digital tax reporting.
The following is a guest post by FreeAgent, which, in the 2017 Software Excellence Awards, was voted the UK’s number one accounting software for small businesses. The company has been scrutinising every stage of the development of MTD and is well placed to offer advice about preparing for the changes ahead.
Some elements in the article first appeared here: https://www.freeagent.com/glossary/making-tax-digital/.
Making Tax Digital – an Introduction
Making Tax Digital is the biggest change to the UK’s tax system for a generation. It is part of the government’s vision to ‘end the tax return for millions’. The rollout has already begun, so it’s important to start preparing now.
The changes associated with MTD will apply to a wide range of taxpayers, including most businesses, self-employed people and landlords. Businesses with a minimum of £10,000 annual sales will be able to opt in to MTD from 2019 but the initiative won’t become mandatory until at least April 2020. Businesses with annual sales below £10,000 will be able to participate if they wish to do so.
The stated aim of MTD is to make tax administration more effective, more efficient and easier for taxpayers, through the implementation of a fully digital tax system. Its basic purpose is to enable businesses and HMRC to calculate taxes throughout the year. This should give companies a much clearer picture of how much they owe at any given time, without having to wait for a single statement long after the end of the financial year. Businesses will be able to manage all their tax liabilities in a single place and, since HMRC will collect and process tax data in near real-time, firms are much less likely to see their tax bills mounting up unexpectedly.
To make all this possible, HMRC will need businesses to report on a quarterly basis (rather than filling in a single annual tax return), and to use digital tools, such as software or apps, to keep records of their income and expenditure.
HMRC has released consultation papers that outline its plans and invite feedback from taxpayers and their accountants. The current plans, in brief, are:
- The smallest businesses will be exempt from MTD. This means businesses with annual turnover of less than £10,000.
- Taxpayers will send in summaries of their income and expenditure at least four times a year.
- More taxpayers will be able to use the cash basis of accounting.
Key milestones will include:
- Spring 2018 – Live pilot of MTD for VAT.
- April 2019 – Businesses with a turnover above the VAT threshold will be required to keep digital records and submit quarterly returns for VAT purposes only through their accounting software.
Businesses will be able to voluntarily keep digital records for ‘other taxes’.
- April 2020 – HMRC will seek to widen the scope of MTD.
HMRC is already making progress. Every small business owner and individual taxpayer now has access to a digital account that they can use to check their records and manage their details.
Further announcements about the initiative are expected in the coming months. Software providers like FreeAgent are actively engaging with HMRC to help with the implementation of MTD and simplify the shift for small businesses.
MTD in Practice and Software Solutions to MTD Compliance
All affected businesses will need to use some form of digital tax software to record their financial information. HMRC has said that spreadsheets can be used, as long as they meet certain technical requirements. However, it notes that spreadsheets will probably need to be combined with software, although it has yet to clarify exactly how. HMRC has also stated that it won’t provide its own software, but will ensure that basic apps and software products are available for businesses with what it terms “the most straightforward affairs.”
Rather than take risks with a DIY approach, many companies will undoubtedly choose purpose-developed commercial software. Tools such as FreeAgent use the data from day-to-day business activities to build an accurate picture of a business’s tax data. They highlight possible errors and offer prompts for entering data that might otherwise be overlooked. Once the software has compiled the relevant information, the company or its accountant can then submit it to HMRC via computer, tablet or smartphone.
FreeAgent has been designed to perform real-time calculations from the information that the user enters throughout the year, and will therefore help to keep track of how much tax the business needs to pay.
Although firms will be required to submit data to HMRC at least four times a year, HMRC has emphasized that this does not mean filing four tax returns every year. It just means that tax liabilities will be calculated as and when a business submits its information. These will be visible in the user’s digital tax account. Although this does not literally happen in ‘real-time’, it will give companies a much clearer idea of how much tax they owe at any given time, which should help to avoid any nasty surprises at the end of the year.
It’s important to bear in mind that this is still an evolving process and the government is continuing to ask businesses and accountants for their feedback. We can therefore expect further changes before MTD is fully implemented.
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The FreeAgent website provides further resources, guides and information about MTD. See: https://www.freeagent.com/guides/making-tax-digital/. (Opens in new window.)
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