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.
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.
The main benefits of Making Tax Digital encompass the following:
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:
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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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:
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.
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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