Sarah Bell, Sage Manager at Blue Logic, discusses how SMEs can prepare for the roll-out of Making Tax Digital in April 2019.
Her Majesty’s Revenue and Customs (HMRC) estimates that it currently loses upwards of £9 billion per year through avoidable taxation errors. The main source of this is the way in which businesses, particularly small and medium-sized enterprises, declare their VAT. To help plug this black hole, the government has deployed its Making Tax Digital (MTD) initiative, which will come into force on 1st April 2019.
MTD will fundamentally change the way businesses submit their VAT returns by fully digitising the process – HMRC says it wants to become “one of the most digitally advanced tax administrations in the world.” But with less than 12 months to go until MTD is initiated, a lot of SMEs are not even aware of MTD and the change it will bring, let alone prepared for the new requirements they will have to meet.
Does Making Tax Digital apply to me and my business?
Some business will be mandated to use Making Tax Digital from the 1st April 2019, but only if they are VAT registered (this means they have a turnover of £85,000+). Non-VAT registered business are not required to use the MTD system, but they can choose to opt-in voluntarily. The government has said it will not widen the scope of MTD until it has proven to work, and certainly not before 1st April 2020.
This means that smaller businesses that do not meet the VAT threshold will not be mandated to use MTD for at least a year after it is first introduced. But given that it has the potential to make filing VAT returns easier and more efficient, as well as unlocking cost savings, it is certainly worth SMEs researching whether an early, voluntary switch to MTD is a smart and savvy move.
So, what’s actually changing?
The big change is that businesses will no longer be able to submit their VAT returns manually through HMRC’s gateway portal. Instead, they will have to use dedicated accounting software such as QuickBooks and Sage to do it digitally. Businesses will also be required to store all transactions in electronic form and have a digital link between final numbers and source data.
It is worth noting that only VAT registered businesses will be required to keep digital records from 1st April 2019, with those falling below the threshold having the option to do so or not. Again, it is worth these smaller enterprises thoroughly researching the benefits of digitising their records and the benefits it may offer. What’s more, if this first phase of MTD is a success its scope will be expanded, and they may be mandated to do so at a later date.
How does MTD benefit my business?
The logic behind deploying MTD – reducing errors and driving efficiency – is widely accepted. The majority of SMEs already use digital accounting software, so using a tax system based on digital technology is the next logical step. For businesses of all shapes and sizes, submitting VAT through accounting software – as opposed to traditional paper ledger practices – will significantly reduce costs.
Research estimates that small and medium-sized organisations could save up to £17,000 per year by using digital accounting software. This is accounted for by a reduction in miscalculations and errors. It will also help businesses to become more time efficient and slash the number of hours spent compiling records and filing returns. This saved time can then be diverted to other business tasks and functions.
Other benefits include:
- Businesses do not have to give HMRC the same information twice or that it can obtain from elsewhere; they can also see the information that HMRC holds on them and ensure details are correct and up to date
- Tax in real-time; organisations will not have to wait until the end of the year to learn how much tax they need to pay
- By 2020, MTD will provide businesses with a single wallet and a clear view of all their tax and liabilities in one place
- A better line of communication with HMRC that means businesses can communicate in the way that suits them best, and at a time of their convenience
What to do if I already use digital accounting software?
As mentioned earlier, a large number of SMEs already use digital accounting software such as Xero, QuickFile and Sage. Business should contact their provider to learn what they need to do prior to 1st April 2019. In most cases, it will mean ensuring they are using the latest version of the software. If you use a managed IT services provider, such as Blue Logic, then they should get in touch with you in the coming weeks if they haven’t already.
In most cases, we would recommend businesses – whether VAT registered or not – prepare for the changer-over now. It is almost guaranteed that the scope of MTD will be expanded over the coming years, and will require all organisations to file their VAT returns – and more – digitally. By embracing the change now, businesses can get used to the new software they will be required to use, and iron out any teething issues they may have.
It is often the case the people and businesses are reluctant to accept change, but in the case of Making Tax Digital it is very much worth the effort.