We’ve heard a lot about Making Tax Digital (MTD) and will continue to do so in the coming months. It introduces extensive changes to how taxpayers record and report income to HMRC.
The new tax regime introduced by the government requires businesses and individuals to register, file, pay and update their information using a new online tax account. The new system impacts those with an annual turnover exceeding the VAT threshold currently £85,000. Businesses with an annual turnover below this threshold are exempt until April 2019, while those with a turnover of £10,000 or below are exempt from the changes.
The tax system is set to be transformed to fit the digital age and will look and feel very different by 2020. For the first time, businesses will be able to see, through their digital accounts, a real-time view of their tax and calculations due. Going digital abolishes the annual tax return as we know it, replacing it with a personalised digital service through which taxpayers will be able to send and receive information to HMRC at the click of a button.
To achieve this, every business with a turnover of more than £10,000 per annum will need to use online accounting software to record income and expenses and submit a summary of that information to HMRC online every quarter. Paper records and spreadsheets will no longer be enough.
According to research by the Institute of Chartered Accountants in England and Wales, nearly 75% of businesses are not currently using accounting software to maintain their accounts electronically. The number is even higher amongst sole traders.
What are the challenges for these businesses?
Business owners must find the right solution which suits their business, as with all technology, one size doesn’t fit all.
Cost is likely to be a big consideration and many businesses won’t want to pay too much to make the jump from Excel. Surprisingly, a good online accounting system does not need to cost a fortune and a monthly subscription can start from as little as £3 per month.
Most small business owners have a smartphone, with this they already have the tools at hand to make the jump to the cloud. It’s a reality to be able to invoice a job or provide a quote whilst working on the move.
Business owners are embracing the digital revolution and enjoying the benefits it brings. Today’s online accounting systems aren’t something to fear: many are easy to use and give small businesses access to the level of information they would only have dreamt of.
It’s now a reality to run a business from your phone with information in real time. To help understand how Making Tax Digital will work, here is a fictional case study featuring a growing recruitment company and may help to put the changes into context.
Heather is a self- employed recruitment consultant with a growing business and has recently crossed the Vat threshold. She has taken on three employees and appointed an agent to help with tax.
What does tax feel like for Heather now?
How will MTD help Heather in her business?
The phasing of keeping track of tax affairs digitally by 2020 is designed to give businesses time to adapt and get used to using tools, such as software or apps, to keep records of income and expenditure.
We have a close relationship with HMRC as all our software solutions are HMRC approved. We will be supporting our customers every step of the way to ensure a smooth transition to the new system. If you have any concerns please contact us at firstname.lastname@example.org.