Making Tax Digital (MTD) is the government’s plan to transform the tax system and move it online. MTD will affect most businesses from April 2019 with further changes expected in 2020.
From 1st April 2019, VAT registered businesses will have to keep their VAT records digitally, and automatically submit their VAT returns to HMRC through ‘MTD compatible software’. The government began inviting VAT registered businesses to join the scheme for VAT (through a ‘public beta’) 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 Crunch-specific beta to ensure the process is as smooth and painless as possible for our 10,500 clients.
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 MTD now.
Who will have to switch to Making Tax Digital for Business?
As we mentioned above, VAT registered business above the VAT threshold 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 sent to HMRC 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, and Income Tax and National Insurance for sole traders have been put back to at least April 2020.
The most recent update from HMRC was the ‘Making Tax Digital for Business Stakeholder Communication Pack’ in July 2018. This confirmed HMRC had opened an MTD pilot for Income Tax 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 compliant software to keep their business records digitally and send Income Tax updates to HMRC quarterly, instead of filing an annual Self Assessment tax return. Users of the pilot will receive an estimate of their tax liability throughout the year. At the moment, the system isn’t able to be used by those with more complex Self Assessment returns.
Businesses, sole traders and limited companies, with turnover above the VAT threshold (£85,000 per year for the 2018/19 tax year), 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.
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 our software has been confirmed as compliant by HMRC. 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 ahead of the 1 April 2019 deadline.
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 Making Tax Digital. Our experts answered questions and explained what actions you need to take to be prepared for the new MTD reporting requirements.
You can view or download the Making Tax Digital webinar slides here.
Making Tax Digital – Our analysis
Of course, change can be a worry, but in our analysis, the initial VAT element of MTD for businesses isn’t going to be much of a bother for the vast majority of affected businesses. If businesses haven’t started to use 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. Others are concerned about the added complexity this all might introduce for their business, or the adverse impact on cash flow with tax payments due sooner. If HMRC extended MTD to include personal tax information, this would affect the 10 million people who currently submit an annual Self Assessment return. So it’s perhaps unsurprising the government has delayed implementing MTD more widely for the time being.
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 preferable to an annual process. HMRC’s roadmap initially set out their plans to connect the many systems they use far more effectively, with more information pre-populated when returns are requested. Although this has largely been put on hold, we still believe this new arrangement will result in less time and effort to prepare and file tax returns for business owners and individuals.
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 introduces, 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 to ensure all of our knowledge and experience about small businesses is fed into HMRC’s future development of MTD.