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Your business
Are you ready to pay your tax digitally?
Registered Gas Engineer looks at how the government’s Making Tax Digital initiative will affect you and how to prepare.
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Every business and all selfemployed traders must submit records of their sales, profits and expenses to HM Revenue & Customs (HMRC) each year, so they can calculate and pay the correct taxes. This process is now changing with the introduction of the Making Tax Digital (MTD) initiative.
HMRC has set out its ambition to be one of the most digitally advanced tax administrations in the world, modernising the tax system to make it “more effective, more efficient, and easier for customers to comply”.
First introduced through the Finance (No.2) Act 2017, MTD is a key part of this goal, which HMRC says will make it easier for individuals and businesses to keep on top of their tax affairs.
Under MTD, businesses and
sole traders will need to keep their VAT and income tax records digitally, then use compatible software to send information to HMRC. Submissions must be made every three months, although any taxes due will need to be paid yearly.
After each quarterly update, you’ll be able to see a year-todate calculation of how much tax you owe. The government says this will help to reduce errors, cost, uncertainty and worry, so that you can be confident you’ve got your taxes right.
It will also help HMRC to reduce what it calls avoidable mistakes – simple errors that affect the amount of tax collected. The latest statistics1 show that these mistakes cost the Exchequer £8.5 billion in unpaid taxes during 2018-19, and the government hopes the improved accuracy of new digital tax records will reduce the amount of tax being lost.
MTD is being rolled out in stages. VAT-registered businesses with a turnover above £85,000 have had to comply with this legislation since April 2019, and 2022 will see the scheme expanded to cover all VATregistered businesses. Sole traders and self-employed people will have to comply from April 2023.
What records do I need to keep?
The government says it’s not asking VAT-registered businesses to keep any additional records, but rather that everything must now be kept in a digital format to reduce the risk of manual typing or transposing errors.
The VAT records you must
keep and submit digitally through MTD-compatible software include: • Your business name, address and VAT registration number • Any VAT accounting schemes you use • The VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made) • The VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received) • Any adjustments you make to a return • The ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell • The rate of VAT charged on goods and services you supply • Reverse charge transactions – where you record the VAT on both the sale price and the
purchase price of goods and services you buy • Your total daily gross takings, if you use a retail scheme • Items you can reclaim VAT on if you use the Flat Rate Scheme.
You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by: • Volunteers for charity fundraising • A third-party business • Employees for expenses in petty cash.
If you’re a sole trader or already self-assess your income tax, you must keep digital records of all your business income and expenses, to be submitted through MTD-compatible software every three months.
All your transactions must be added to your digital records. Invoices must be kept for a minimum of six years, but these can still be stored in paper format if preferred.
At the end of each financial year, you will also be able to submit any personal income and reliefs before you make a final declaration. This includes bank and building society interest, student loan repayments, dividends, and pension contributions. This system will replace the current self-assessment tax return.
Any tax owed will then need to be paid by 31 January the following year.
What software do I need?
Many people already use software to keep their business records, but you should check whether the software you use is MTDcompatible. If it is not, or if you currently rely on paper records, you should upgrade your systems and processes.
MTD-compatible software integrates with HMRC systems to send your financial data directly using an Application Programming Interface (API). HMRC doesn’t have its own software, or endorse or recommend any products, but it does provide a list of MTD-compatible software at
www.tax.service.gov.uk/
making-tax-digital-software.
Most of the 500+ programmes listed require a paid subscription, although there are some free options.
Making Tax Digital: a timeline
1 April 2019: MTD initiative was introduced for all VAT-registered businesses with a taxable turnover above £85,000 (the VAT threshold). A six-month exception was made for ‘more complex’ businesses such as trusts and not-for-profit organisations
October 2019 More complex VATregistered businesses are required to comply with MTD
April 2022 MTD will apply to all VAT-registered businesses, regardless of taxable turnover
April 2023 MTD will apply to all self-assessment income taxpayers, unincorporated businesses, and landlords with a total income above £10,000 a year.
Are you ready to pay your tax digitally?
There are two different types of compatible software.
Record-keeping software
enables you to enter and store your financial data digitally all in one place, then links to HMRC to be filed directly. If your existing software is not compatible, such as a spreadsheet or in-house book-keeping system, you may be able to continue using it by linking it to additional bridging software.
Bridging software can take information from other software, then convert it into a format that can be submitted digitally to HMRC, effectively acting as a bridge between you and HMRC. It must be able to extract or receive the information digitally – the key is that information must not be re-typed manually anywhere, to reduce the risk of data entry errors. Instead, it must only be exchanged digitally by, for example, linking cells in spreadsheets, emailing records to your accountant, or downloading and uploading files.
Can I sign up early?
A pilot scheme is already up and running for self-employed people who want to begin working to the new rules early. You can sign up at www.gov.uk/guidance/
sign-up-your-business-formaking-tax-digital-forincome-tax
HMRC says around 30 per cent of self-employed people and landlords are already taking part in the pilot scheme, and is encouraging people to try it to get used to the process before the initiative becomes compulsory.
Can I use an accountant?
Yes. If you don’t want to submit your own returns, you can employ an accountant to do it for you, but your sales figures, invoices and expenses must still all be recorded digitally – you can’t just add up your figures and submit the totals.
If you want to use an accountant, you can either record all your financial information digitally and ask your accountant to send it to HMRC, or you can send copies of all your physical paperwork to your accountant, who can then prepare your digital books and submit them to HMRC. This this will require more book-keeping work by your accountant, and will likely incur higher costs.
Ben Dyer, CEO of Powered Now, which provides field service management software for the trades, says: “Many businesses need to start giving some thought to MTD, but may not have done so. As a result, they are probably in for a bumpy ride. Every trade business should be considering their plans for MTD. My strongest advice would be simply this: don’t get caught out at the last minute, and plan early so that your finances are in check throughout the year.”
How much will it cost?
Any sole trader or small business that currently relies on paper accounts or simple book-keeping programmes is likely to face increased costs.
The government has said implementing MTD-compatible software could cost businesses around £175 upfront, with HMRC estimating that they will then incur continuing costs of about £20 a year, although the amount will vary from business to business.
However, the Institute of Chartered Accountants in England and Wales (ICAEW) has estimated that potential costs could be much higher, nearer £1,250. A poll by the Association of Taxation Technicians (ATT) showed that 45 per cent of businesses that have already signed up to MTD have paid anywhere from £109 and £500 to switch to the new system, while 12 per cent said it has cost them more than £5,000.
Although the core aim of MTD is to make the tax returns process easier and more efficient, almost 90 per cent of respondents to that survey said the new process had not reduced the number of errors, while many reported an increase.
What about Corporation Tax?
We don’t yet know when MTD will be introduced for Corporation Tax payers. A formal consultation was held on the future design of MTD for corporation tax at the beginning of 2021, and the government is now considering the next steps.
It is expected that a pilot of the MTD initiative for Corporation Tax will take place in due course, but HMRC has said it will not become mandatory for Corporation Tax before 2026. ■
