5 facts you'll need to know about Making Tax Digital
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You may have heard of the Making Tax Digital system that HMRC is going to insist we all use in due course, reporting our accounts information to HMRC quarterly and electronically.
It was going to start in 2018 for the self-employed and landlords, but it’s been clear for a long time that HMRC’s truly awful IT systems won’t be ready or reliable then.
So HMRC have changed their minds and now only businesses with a turnover above the VAT threshold (currently £85,000) will have to send off these digital records and then only for VAT purposes. They will have to start from 2019.
And no-one will have to keep digital records or update HMRC quarterly for other taxes until at least 2020. By then HMRC presumably hope to have purchased enough rubber bands to keep their systems going.
But let’s not kid ourselves – HMRC are firmly wedded to the idea that Making Tax Digital (MTD) is going to happen, so we must all plan now.
1. Why do HMRC want to push ahead with MTD?
HMRC have long thought small businesses don’t show all income on their tax returns, or claim expenses that are not legitimate business expenses and thus underpay their tax. Maybe they are right. Maybe they should also pursue the huge multinational businesses more aggressively for some tax.
2. What will you have to do differently when MTD is compulsory?
All businesses will be expected to do their bookkeeping regularly, and to use their own software that will enable them to transmit data direct to HMRC. This will be a real problem for those who leave their bookkeeping to the end of the year. Whilst very small businesses may be able to get free software for this job, most businesses will have to pay for the privilege.
HMRC will expect all businesses to transmit their business data (showing income and expenditure) quarterly and electronically to them. Businesses will then be able to see HMRC’s calculation of their expected tax in their online account.
10 months after the year end, or 31 January after the year end, whichever is earlier, a final end of period statement must be filed to HMRC including any adjustments to the previous quarters’ figures. Figures from that statement will generate tax figures shown in the digital tax account. So that’s 5 lots of notifications for business owners to be responsible for.
A final declaration (which replaces the current tax return) must be filed by 31 January.
3. Plus points for you
Every individual and business can now access their own online tax account with HMRC. Not everyone uses this option. Many still expect their accountant to do this for them. If you haven’t yet set up a login for your account – do that now. By the time MTD goes live you should be able to see a lot more information in this account generated by HMRC than you can now.
A positive aspect of MTD is that HMRC will prepopulate each taxpayer’s data with information it already has - on e.g.employment and pensions income. That will save some unnecessary work.
Eventually individuals shouldn’t need to complete an annual tax return, because HMRC will have received the data for it via MTD.
In principle, it makes sense for HMRC to get the data much earlier from businesses than it does at the moment. It’s also useful for taxpayers to know well in advance what their tax bill will be.
4. What could possibly go wrong?
Anyone who’s had to file data online with HMRC over the years will know how awful their IT systems currently are. They have several old systems that have to “talk” to each other. Often the outcome is double Dutch. So accountants spend a very large amount of time asking HMRC to correct what is actually an HMRC error.
Recently there have been major HMRC system problems with payroll online filing.
Many in the accountancy profession question how competent senior managers at HMRC are in designing a system for MTD that will work properly. We wonder if they’ve got enough programmers to handle the change. Because their current systems don’t appear to be fit for purpose we don’t feel confident about the future.
Some businesses will want their accountant to do the quarterly submissions for them, but there will have to be an extra charge for that.
5. What to do now
If you aren’t using an off the shelf bookkeeping system now I would urge you to sign up for Xero. It’s one of the easier software packages to learn and it’s in the cloud so you can access it from anywhere. When MTD comes in you can transmit your MTD data direct from Xero.
If you need some training to get your bookkeeping up to date, or tax help and advice, call Frances on 01737 559211. We specialise in small business tax and accountancy.