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‘Making Tax Digital’: Making Business Digital

Some of you may have noticed HMRC’s publicity over Making Tax Digital or ‘MTD’. If you haven’t, it is HMRC’s vision of replacing the annual tax return with quarterly digital submissions direct from accounting software.

A number of systems changes are / were required at HMRC’s end; for instance the information it collects on interest paid by banks / building societies plus PAYE information on any employed earnings are held on separate systems. On the evidence to date, this does appear to be working. You can sign in or setup your own personal tax account to see this in action here.

At the same time, HMRC has to gather information on a timely basis on income and expenditure that does not fall within the relatively simple categories above; namely business profits.

The implications for businesses, landlords, and their accountants, are potentially vast, but this doesn’t have to be a negative and significant benefits could be realised. At present, a typical business hands over its accounting records to the accountant some time after the year end, the accountant works tirelessly on the records and, some further weeks or months later, accounts are produced showing the profit for the year. Once the accounts are finalised the owner’s personal tax return preparation can then begin in earnest using additional records they supply.

Making tax digital could change all of this. The business’s own accounting systems could be connected to our own, so quarterly returns can be estimated within 30 days of the quarter end. Imagine knowing an estimate of your profit share and drawings in year; would this impact on the decisions you and the business make as the year goes by?

Obviously, from a business and accounting practice viewpoint, the systems to deliver HMRC’s dream are still being developed. We are investing a large amount of resource in to making tax digital and the impact it will have on our business, and yours, as we believe it is the [not too distant] future.

The journey from ‘where we are now’ to HMRC’s end vision is expected to take a few years but, based on HMRC’s statement, there is little doubt it will come in due course: “The appetite for digital services is strong, and relying on a predominantly paper-based tax system makes no sense in the 21st century.”

Until recently there was considerable concern that businesses would need to start reporting for income tax purposes quarterly, and digitally, from April 2018. However, following pressure by accountants and the business community, in mid-July HMRC announced that only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes.

  • At the autumn Budget, the Chancellor has announced that the VAT registration threshold will be frozen at this level for two years from April 2018
  • Businesses will only need to keep records digitally from April 2019
  • Businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020
  • However, should the VAT registration threshold be lowered at the end of the two year moratorium period (as has been suggested by a recent Office of Tax Simplification review), then this might result in something of a ‘perfect storm’ for businesses coping with digital VAT reporting and digital reporting more broadly, from 6 April 2020.

In reality, as most if not all VAT registered businesses use some form of well-known software (Iris / Sage / Xero for example), we expect the software providers will work to ensure compliance. Their ability to do so has been eased by the extended deadline.

In order to meet HMRC’s end vision clearly there will need to be a change in the way financial data is managed. In due course, businesses will need to generate this information quarterly, and they may need help from their accountants each quarter. Unless accounting systems can be used effectively to deal with much of this, the costs to practices may rise.

The impetus towards MTD should be viewed as an opportunity. Many businesses already have computerised accounting packages in place, maintained by some combination of finance assistants / bookkeepers. The new breed of accounting packages have the potential to increase this collaboration whilst, at the same time, cutting down the amount of manual entry time in writing up books and records – a necessity when quarterly filing arrives, but until then, a pure time saver.

And over the past few years, in particular as finances have tightened and businesses want to be able to present an up-to-date picture to potential new managers, many more business owners have been starting conversations about how to provide management accounts to enable them to better monitor their businesses. We see MTD as providing extra impetus for these businesses to generate their own information on a timely basis.

In due course, MTD will require accounting systems to talk with HMRC’s own software in respect of sole traders’ and partners’ profits / income tax, either directly, or via our systems after we have made the necessary adjustments. Many of the systems businesses already use are well on track to achieve this; others less so. Many small businesses are using Excel spreadsheets that will not file directly to HMRC, but third party developers are working on solutions for this However, is this really the future?

More and more, our commercial clients are turning towards cloud based solutions which provide anytime / anywhere access to the accounting records. This means that we can be looking at your data at the same time you are, leading to more valuable and timely advice. Today’s cloud solutions are also often cheaper and better alternatives to desktop software.

We are talking to our clients about software and dealing with MTD; if you would like this conversation sooner rather than later please contact one of our Tax Accounting Experts and we will be pleased to help.

FEATURING: Lisa Macpherson
Lisa is the Head of Tax Technical at PKF Francis Clark, supporting the firm’s teams on tax policy and technical issues across its offices and… read more
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