Making Tax Digital (MTD) is the government’s plan to shift tax online. This has been on the cards for several years but has been hit by repeated delays, with most businesses now not being affected until 2019 at the earliest.
From 1st April 2019, VAT registered businesses will have to keep their VAT records digitally, and automatically submit their VAT return information to HMRC through ‘MTD compatible software’. The government announced a public beta for VAT registered businesses on 16th October 2018.
If you’re a Crunch client, you should not join the public beta. We’ve been working closely with HMRC on a private beta to ensure the changeover to the new process is as smooth and painless as possible.
If you’re VAT registered, or close to the VAT threshold, and you don’t currently use a digital accounting package (such as Crunch) to record your VAT information, then you need to start planning for Making Tax Digital now.
Who will have to switch to Making Tax Digital for Business?
The government initially planned to introduce MTD for the majority of taxes, but in 2017 this was changed to a staggered introduction.
As we mentioned above, VAT registered business will be affected from 1st April 2019. These businesses already have to report and pay any VAT due quarterly so the main change is the requirement for these records to be stored digitally and communicated using MTD compliant software. The days of just using excel spreadsheets are probably over!
The dates for introducing MTD for further taxes including Corporation Tax for limited companies, Income Tax and National Insurance for sole traders have been put back to at least April 2020.
The previous update from HMRC was the MTD for Business Stakeholder Communication Pack in July 2018. This confirmed that HMRC had opened an MTD for Income Tax pilot for sole traders with income from one business, or landlords who rent out UK property (excluding furnished holiday lettings).
The pilot allows people who meet the criteria to voluntarily use MTD approved software to keep their business records digitally and send Income Tax updates to HMRC quarterly, instead of filing an annual Self Assessment tax return. They will receive an estimate of their tax liability. At the moment, the system isn’t able to be used by those with more complex Self Assessment needs.
Businesses, sole traders or limited companies, with turnover above the VAT threshold (£85,000 per year from April 2017), have until 1st April 2019 to comply with MTD. After this date, all VAT registered businesses will need to store and submit their records digitally in line with MTD.
Some further exemptions for charities, large firms and partnerships have also been announced.
How do I prepare for Making Tax Digital?
If you’re a Crunch client, don’t worry – it’s all in hand. We’ve been working with HMRC for some time and are already testing using our private beta. We’ll be in touch with all our VAT registered clients over the next few months to let them know what to do to ensure a smooth transition.
If you aren’t a Crunch client and your business is VAT registered, you can catch up with our recent 15-minute webinar and Q&A on MTD. Our experts Ben Schaefer and Luke Young answered questions and explained what actions you need to take to be prepared for the new Making Tax Digital reporting requirements.
You can view or download the webinar slides here.
Making Tax Digital – Our analysis
Of course, change can be a worry, but in our analysis, the initial VAT element of Making Tax Digital for businesses isn’t going to be much of a bother for the vast majority of affected businesses. If they’re not already using approved software to store and submit VAT information to HMRC, they’ll need to start making plans to do so ahead of 1st April 2019.
Many people are worried about what additional plans HMRC have for MTD. These are currently not finalised. Previous plans have been put on hold until 2020 at the earliest.
If they did include moving to quarterly Self Assessment, for example, this would impact far more people. Others have been concerned due to the added complexity this all might introduce for their business, or potential impacts on cash flow with tax payments due sooner.
Far from introducing more paperwork, we think these potential changes are a welcome modernisation of the UK tax system. In fact, it’s just catching up with where tax should be. Many UK businesses already report VAT quarterly and pay it soon after filing. In much of Scandinavia and Central Europe, digital tax accounts with monthly or quarterly filing have long been the norm, as has been paying tax more quickly.
We believe that little and often in terms of tax filings is far preferable to a big annual rush. HMRC’s roadmap initially set out their plans to connect the many systems they use far more effectively so that there will be much more information pre-filled when returns are requested. Although this has largely been put on hold, we still believe this new arrangement wouldn’t be like four mini Self Assessments, and would actually result in less stress for business owners.
Ultimately, if you’re using online accounting software like Crunch to manage your business accounts, then you’ll see little difference. Crunch will integrate with whatever new technology HMRC bring forward, whilst continuing to give you a live view of your tax position as we always have. As long as you keep putting your invoices and expenses into the system, online or using our apps, all will be well.
Crunch will continue working closely with HMRC to ensure all of our knowledge and experience about small businesses is fed into HMRC future consultations.