Changes to tax rules are usually nothing more than a mild (and occasionally expensive) annoyance.
In April 2019, however, the usual legislation tweaks will be accompanied by a complete overhaul in the way that VAT registered businesses with more than £85,000 annual turnover need to manage their tax.
It's called Making Tax Digital.
What is Making Tax Digital?
Don't worry if you haven't heard of Making Tax Digital — 40% of small business owners are in the same boat.
In a nutshell, Making Tax Digital (MTD) is a UK government initative to further digitise the tax system to bring an end to annual tax returns and manual submissions.
Instead, relevant information will be automatically uploaded to HMRC's systems every quarter. These updates should be far more accurate than manual submissions, given that data is transferred directly from your records.
The changes will eventually affect the vast majority of businesses and the self-employed, and anyone else who fills in a tax return.
How will Making Tax Digital affect my small business?
The first raft of changes will take effect in April 2019. VAT registered businesses with an annual turnover of at least £85,000 will need to keep VAT records in digital form, and file VAT returns directly to HMRC via MTD-ready software.
You won't be able to enter values manually through the HMRC website.
You'll also have the option of submitting additional tax information (such as National Insurance contributions and corporation tax) using this same method. This won't be compulsory until April 2020 at the earliest.
If your business is below the £85,000 turnover mark and voluntarily pays VAT, you won't need to use this new system until April 2020.
If you're already using accounting software, you need to check that it's MTD-compliant — or will be soon.
If you work with an accountant, discuss the transition to MTD. They should help you understand the processes involved, recommend software, and create a timeline for the change.
A basic spreadsheet won't be sufficient for MTD, as there's no way to directly submit the data within it to HMRC. However, it is expected that there will be add-ons for more popular spreadsheet software that will 'talk' directly with HMRC through its application programming interface (API), or some kind of bridging software.
It's not yet clear how this will work in practice; you may have to pay for these spreadsheet add-ons.
Making Tax Digital: FAQs for small business
What is a digital link?
A digital link is a term used by HMRC to describe links between various sources of data that are digital, not manual. For example, you may use two different spreadsheets to manage VAT records. The first contains all VAT records for every transaction, while you use a second spreadsheet to calculate VAT returns.
Under the new rules, there must be a digital link between the two spreadsheets. Data must be transferred digitally from spreadsheet A to spreadsheet B — and you can't copy and paste it. Excel and Google Sheets both allow you to import data from other spreadsheets through simple formulae.
CSV imports/exports or emailing spreadsheets to an accountant to import into software also count as digital links.
Essentially, you can't make manual adjustments to your VAT data once it's digital. Every spreadsheet and other accounting software you use must be linked digitally, up to and including when information is submitted to the taxman.
Can I still keep paper records as long as the end calculations are submitted electronically?
Technically yes, but practically no. You'll need to store each individual VAT record electronically — you could do this by entering your paper transaction records into your spreadsheet or software one by one, but this amount of work isn't realistic for most businesses.
Will my current online VAT submission exemption still apply?
Yes, almost certainly.
As a side note, if your business isn't currently exempt from filing returns online, it'll be difficult to prove to HMRC that you should be exempt from the new MTD rules.
Will HMRC be producing any free software for MTD?
No. Instead, HMRC are relying on the market to offer affordable (and free) MTD products to small businesses.
However, HMRC are producing an API which will enable software providers to easily comply with the new rules.
What does 'soft landing' mean?
You may have heard this phrase in relation to MTD software. The 'soft landing' period runs from April 2019 to April 2020. During this period, businesses don't need to have digital links between all their spreadsheets and software (as detailed above). The digital links rule only comes into force in April 2020.
The only exception to the 'soft landing' period is the final step before submission to HMRC — for example, when you transfer prepared VAT return data to bridging software solely to submit to HMRC.
What about non-VAT taxes? Will these have to be submitted digitally?
Not yet. The government does want to extend the scheme to all business taxes, but the next stage will only be rolled out after the VAT stage has bedded in.
Will the Making Tax Digital software be expensive?
Probably not — there's plenty of competition between the biggest software providers, and they'll all be looking to win over new customers who need a solution for MTD. Most small businesses shouldn't need to spend more than £10-20 per month on MTD-ready accounting software, and you won't need to buy any special hardware.
What do I need to look for in Making Tax Digital software?
If you're unsure if a particular software product is MTD-compliant, check for the following features:
- Ability to create a VAT return from stored digital records
- Submit VAT data to HMRC directly through the software, in the correct format
- Receive information from HMRC through their API
Will Making Tax Digital bring any benefits to my business?
Once you've set up your software and become used to the new processes, you will start to see some benefits from MTD.
- Improve the quality of your records — fewer missing fields etc.
- Reduced need for data entry and re-entry (data should automatically be fed through to all the relevant systems)
- More accurate records (and tax bills)
- Save time on tax and accounts admin
It's important to know that nothing in this article in set in stone — in fact, many big businesses are expecting HMRC to further delay the implementation of Making Tax Digital. We should hear either way on or before the Autumn Budget, which should take place in November.
We'll update this post if and when more details about Making Tax Digital are announced.
However, even if there is a delay to MTD, it's probably worth making the switch sooner rather than later. After all, once any teething problems are resolved, you should start to see real benefits from digitising your accounts in this way, and you'll have more time to understand how the software works without the pressure of needing to comply with the new rules immediately.