Making Tax Digital: What small businesses need to know

In a move to increase efficiency, HMRC is transitioning business tax returns to a digital, paperless process. Beginning in April earlier this year, Making Tax Digital – as the name suggests – seeks to keep digital records and use software in order to complete tax returns. As a result, keeping paper records will not meet the requirements of tax legislation.

The changes to the UK’s tax system obviously have implications for small businesses. And, with a survey that took place before phase one suggesting that one in five weren’t even aware of the programme, it’s a development that SMEs will increasingly need to become more aware of.

For businesses looking to become more familiar with the programme, we’ve pulled together some of the key points to be aware of on Making Tax Digital. We’ll cover the details of what it entails, important dates and rollout times, and weigh up any implications for small-to-medium businesses should they be affected.

What is the Making Tax Digital programme?

Designed to improve efficiency, Making Tax Digital is HMRC’s paperless approach and an important element in the government’s plans to “make it easier for individuals and businesses to get their tax right and keep on top of their affairs”. Through this easier, more efficient process, the HMRC hopes to become one of the most digitally-advanced tax administrations in the world.

It affects practically everyone. If you pay tax and file a tax return in the UK, businesses, individuals, non-profits and more will all be affected; basically, any entity which files a tax return, uses an accountant or receives income from any place other than standard PAYE payroll should take note.

Accordingly, this faster electronic approach to filing tax information created by HMRC is compulsory for the above.

What are the other expected benefits of Making Tax Digital?

The main benefits of Making Tax Digital encompass the following:

• Businesses will have their own personalised digital tax account that gives them a complete view of all their tax information, liabilities, and entitlements from a central place.
• Increased accuracy and reduced errors when reporting and filing taxes, so businesses only pay what they actually owe.
• HMRC can be updated with business and financial information quicker and easier.
• Fewer compliance checks and audits from HMRC.
• Reminders in the form of digital prompts from HMRC to ensure businesses are capturing and reporting the correct information at the right time.
• Online billing that allows businesses to pay their taxes instantly.

When did it come into effect? A Making Tax Digital timeline

Originally, Making Tax Digital was to be introduced in phases between 2018 and 2021, but after consultation with the industry, the first stage only became compulsory in April of this year. A brief timeline of the process is as follows:

• April 2017: The Making Tax Digital private pilot begins for those who have voluntarily subscribed.
• July – December 2017: Digital tax account show taxpayers an overview of their tax liabilities in one place. Elsewhere, HMRC begins a private pilot of Making Tax Digital for VAT.
• April 2019: VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 need to keep digital records and submit digital VAT returns using compatible software*. “More complex” businesses, such as trusts, not-for-profits, VAT divisions, and VAT groups among others, get a six-month deferral.
• October 2019: More complex businesses who were deferred will by now have to comply with Making Tax Digital.
• April 2020: HMRC will implement Making Tax Digital for Income Tax and Corporation Tax.

Note that the second two deadlines may very well change based on government consultations. The best place is to check the HMRC website for the latest information.

*Businesses who are VAT registered but have a turnover of less than £85,000 are not required to comply with the new rules but can voluntarily comply with making the mandatory switch in April 2021.

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What are the implications for SMEs?

At this point, you might be wondering how this will affect your own business. It’s worth noting that while HMRC didn’t charge anything to make the move to Making Tax Digital, updating your internal business processes and other admin might have a hidden cost. The HMRC website states that this cost is likely to arise from:

• The time it takes getting up to speed on new digital tools and quarterly submissions of information.
• Purchasing of new apps and upgrades to existing software.
• Purchasing new hardware or upgrades to existing hardware.
• Additional accountancy or agency costs.

It also changes the way the business or its accountant interacts with HMRC. Now, you’ll be able to get in touch with them digitally at a time that suits you; from here the HMRC provides support, advice and prompts to guide you through various digital channels.

Now, you’re able to contact them through web chat and secure messaging, as well as link your digital record-keeping software to their systems directly, allowing for a fast, easy way to accurately exchange important information.

As we hinted at above, Making Tax Digital has the potential to reduce the chances of audit or compliance checks. HMRC wants businesses to get their tax right first time round to prevent reproach for what is essentially an honest mistake. The reduction in the likelihood of errors means reducing the chances of compliance checks and providing businesses with greater certainty.

The quarterly submissions you fill out means more time spent on book-keeping, unfortunately. But the upshot of this is less time filing old-fashioned annual tax returns as a result.

While it means you won’t pay more tax because of the programme, it adds clarity to the process. As everything is saved in one place, there’s less room for error, whether unintentional or otherwise. HMRC hopes that will help collect some of the billions of pounds that are avoided, in turn using this money to fund programmes that benefit everyone.

How do small businesses register for the process?

Small businesses can sign up for Making Tax Digital at gov.uk, where a support function is available should you need assistance. Note, that when the first phase of Making Tax Digital is in motion, you can’t go back and use your old method. Once you’re signed up to Making Tax Digital, you must start using programme-compliant software to send your returns.

Non-compliance is relatively lenient at the moment. HMRC recognises that this programme is a big change for business owners, and they realise that mistakes may be made during the transition period. At a later stage, there will be penalties for non-compliance, but if something out of a business’s control goes wrong or there’s a genuine incident, HMRC may refrain from inflicting penalties.

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