How to prepare your small business for Making Tax Digital
Posted: Wed 6th Mar 2019
Under the government's Making Tax Digital (MTD) scheme small businesses will need to file taxes online directly from accounting software.
Nadia Hossen Mamode is an ICAEW chartered accountant at Bee Accountancy. In this blog, she explains everything you need to know to get ready for the change.
What is Making Tax Digital?
HM Revenue & Customs (HMRC) wants to become one of the most digitally advanced tax administrations in the world. Making Tax Digital aims to transform tax administration so that it is:
more effective
more efficient
easier for taxpayers to get their tax right
Using digital records will help avoid transposition errors. HRMC said avoidable mistakes cost the Exchequer over £9bn a year.
Who does Making Tax Digital impact?
"MTD is a long-term project that that's being introduced on a phased basis. It will eventually impact all tax payers," said Mamode.
VAT-registered businesses above the threshold of £85,000 will be the first impacted. These businesses are required to use the Making Tax Digital service to keep records digitally and use software to submit their VAT returns from 1 April 2019.
When does Making Tax Digital come into effect?
The first phase of MTD starts from 1 April 2019 when VAT-registered businesses above the threshold of £85,000 will have to keep digital records and submit VAT returns using compatible software (HMRC has a list of approved programmes).
Other components of MTD, such as income tax and corporation tax, have been placed on hold until April 2020 at the earliest.
The exception is a small minority of VAT-registered businesses with more complex requirements, such as not for profit organisations that are not set up as a company. The mandates for these companies has been delayed until 1 October 2019.
What steps do business owners need to take to prepare?
VAT-registered businesses above the threshold of £85,000 need to take immediate action and ensure that they are using MTD-compatible software ready for the 1 April 2019 deadline.
Digital tax tools can help small business owners keep their accounts up to date. Having accurate and timely information to hand helps make better decisions.
"Accounting should no longer be an afterthought in business," said Mamode. "An accounting strategy is needed as part of business planning, including: separate business bank account, MTD-approved software and how information from receipts will be recorded."
How can you find Making Tax Digital approved software?
HMRC has lists of MTD-compatible software on its website. Your own accountant may offer you some guidance regarding which software to use.
Should we change the way we're storing receipts?
Digital record keeping is one of the key components of MTD. This means that information from your receipts such as date, value and VAT are recorded by the software. In many cases, they have the facility to scan reciepts and record information with your phone.
This encourages small business owners to keep track of their expenses and bills in a more efficient way.
What preparation do landlords need to do?
Landlords with a VAT-registered business that has a taxable turnover above the VAT registration threshold will have to meet the 1 April 2019 deadline. Residential letting is exempt from VAT.
"We are building functionality so that businesses and landlords will eventually be able to send information about all types of income using software," adds government guidance on MTD.
What's the next phase of Making Tax Digital?
HMRC is looking to widen the scope of MTD in April 2020. At this point, additional taxes to VAT will start to become mandated.
This will likely include self-employed individuals, those with rental income from property and corporation tax.
Relevant resources
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