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Guide to Making Tax Digital

Making Tax Digital (MTD) was first announced by the Government back in 2015. The initiative has been introduced for a variety of reasons and has primarily been designed to modernise the UK’s tax systems. As part of the initiative, businesses are expected to keep digital records of their accounting transactions. Digital tax accounts are being used to ensure taxpayer’s details are stored in a centralised location. As part of Making Tax Digital, taxpayers can update information, register for services, see how their tax is being calculated and take a look at their tax affairs as things stand, in real-time online.

Making Tax Digital for VAT

VAT-registered businesses with turnovers over the £85,000 threshold will need to provide quarterly VAT reports from the second quarter of 2019, though those with lower turnovers have the option of submitting quarterly accounts and data. Other components of MTD, such as Income Tax, have been placed on hold until April 2020 at the earliest.

Quarterly filing

Businesses that are obliged to file quarterly must keep digital records. Those with lower turnovers have the option to do this. Many businesses with turnovers over the VAT threshold will need to file their first quarterly VAT return in line with the new Making Tax Digital regulations in July – August 2019. This will cover the April – June 2019 period. However, if your VAT return period ends in April or May, you will need to file it in May – July or Jun – Aug 2019.

Keeping digital records

Digital records are those that are stored in an electronic or digital format and can be viewed on devices like smartphones, laptops, tablets and desktops. These records could come in the forms of digital representations of paper-based records or entries made into software products, apps and other electronic systems. Each record has to include the date, amount and the category of each transaction. Digital record keeping is mandatory for VAT-registered businesses, which means they need to record VAT invoices and receipts with the use of software. Non-VAT registered businesses are able to gain updated tax estimates when required. This can help them make cash flow forecasts more efficiently. VAT-registered businesses that are yet to start planning for MTD are advised to do so at their earliest opportunity, with 1st April 2019 just a matter of months away.

Digital links

It’s also essential to gain an understanding of what HMRC are branding “digital links”. These are exchanges or transfers between apps or software programmes. Whenever data is entered into an electronic system, digital links must be used to transfer, modify or recapture the information, so a digital journey can be created. It’s not enough to simply ‘cut and paste’ information, as this is not regarded as a digital link.

Which software can be used?

Any software you use to send a VAT return needs to be tested, and links to HMRC need to be authenticated. All software systems are given unique references, enabling authentication to occur when systems link to HMRC’s API (application programming interface). Many accountants are still using the gateway provided by HMRC to complete submissions for small-to-medium businesses, though special products are available for larger companies and organisations. All taxpayers will submit tax returns digitally in future years. However, the requirement to report quarterly is only set to affect some companies, organisations, individuals and sole traders.

Quarterly trading and property reports

Individuals, executors and trustees only need to report income from trading or property on a quarterly basis. This only applies to those with trading and/or property income over the £85,000 threshold. If you are required to report on a quarterly basis, you may actually need to make up to six submissions, once the annual submissions and declarations are considered. Partnerships are also affected, though they need to report all income for each quarter rather than just income from trading and/or property. The intended start date for Corporation Tax MTD of April 2020 at the earliest, has been put on hold for the time being.

The purpose of Making Tax Digital

The Government says Making Tax Digital has been devised to help individuals and businesses to manage their taxes. MTD has been introduced to transform the tax system, with quarterly updating being required by businesses, self-employed individuals and landlords. It covers VAT, Corporation Tax and self-assessment. The government decided to introduce MTD in stages, delaying its initial launch from 2018 to 2019. The first affected area was VAT. The changes were first detailed in the second Finance Bill of 2017. It was decided that only VAT-registered businesses would need to keep digital records and that they would only need to do this from April 2019.

The use of spreadsheets

If you use spreadsheets to record and store your business records, you will need to make sure these are capable of submitting data to HMRC. You can do this by making use of an API-enabled spreadsheet or by using software that has been enabled by MTD.

Will you meet the threshold?

If your business isn’t VAT-registered and you don’t know if you will reach the £85,000 threshold this year, monitor your taxable turnover each month to see if you are likely to meet this. If you go over the threshold during any 12-month period, you will need to register for VAT and therefore become part of the MTD initiative. If you go over the threshold and then fall under it again, you will still have to comply with the legislation, until you deregister from VAT. Should your business be under the VAT threshold but you want to partake in MTD, you can. You have the right to waive exemption as long as you are willing to comply with MTD regulations.

HMRC are not providing MTD software

If you are obliged to become part of MTD, you won’t be able to simply log in and type your figures into the HMRC website like more than two-thirds of businesses have been doing up until recently. You will instead need to provide electronic uploads to the HMRC system from your accounting package. It’s important to note that HMRC are not providing software for this purpose. You will instead need to use software products that are already available on the market. The penalties for failing to comply with MTD can be sizeable and can have a devastating impact on your business.

MTD for individuals

Making Tax Digital for Individuals is focused on the Personal Tax Account or PTA. This offers many of the services that are required by PAYE taxpayers. The PTA is still in development but will eventually provide a comprehensive range of services for individuals. Individual taxpayers are defined by two separate categories, with some completing self-assessment tax returns and others being taxed at source by the PAYE system. It’s not uncommon for individuals to move between the two categories. The PAYE system is centred upon information like tax codes, income data reported by employers, charity tax relief, marriage allowances, expenses, pension contributions and more. The PAYE system is also used for collecting tax on non-PAYE income such as income from property that falls below the £2,500 threshold, income from investments of less than £10,000 and dividend income that falls below the same threshold. The new PTA system will provide taxpayers with greater visibility when it comes to their financial affairs and will enable individuals to quickly check whether information held on them is correct. A new system called dynamic coding has been developed to reduce the number of taxpayers faced with over and underpayments.

Are upgrades needed?

You may face considerable one-off costs as you prepare for Making Tax Digital for VAT. You may need to upgrade the hardware and software that you are using and could need to pay for professional assistance to prepare yourself for the transition. You may also have to spend time and money on training your staff to get to grips with the new legislation. The software solution that you use must be able to calculate the tax that you owe automatically. It must be able to pull data from your invoicing software, POS system or bank and update transactions on a daily basis, so you can avoid falling behind with reconciliation. You should be able to create a digital record of each paper receipt simply by taking a photograph of it.

A smooth transition

There are many positives attached to Making Tax Digital. If you are already used to taking photos of receipts and invoices, the transition could be relatively straightforward. Advancements in technology have been providing businesses with more certainty than they have previously experienced, with data analytics and machine learning enabling companies and organisations to make more informed decisions and remove much of the risk from their financial choices. Prediction tools have helped a wide range of businesses to manage their cash flow more effectively, whilst software has enabled companies to identify mistakes quickly and correct them before submitting their financial data to HMRC.

Do you need help with MTD?

Companies that are less likely to be prepared for Making Tax Digital include rural-based businesses including farmers, who often experience poor-quality internet connections and have become used to completing financial transactions by hand over the years. These companies can benefit from outsourcing tax, bookkeeping and accounting administration to a reputable, compliant organisation such as Perrigo Consultants.

The future of MTD

MTD is set to completely change the way that HMRC deals with taxpayers. Starting with VAT, it will eventually cover almost all taxes. You will no longer be able to submit your VAT returns via the government gateway if you are over the threshold. Most companies that use cloud-based software are already prepared for MTD and simply need to file their returns using the software as opposed to the government gateway. It’s possible that you might need to invest in software upgrades to be fully compliant, especially if you are currently using a bespoke product.

MTD and the cloud

If you are using spreadsheets and plan on doing so in the future, you will need to buy bridging software that links your spreadsheet to HMRC so you can file every quarter. It’s advisable to upgrade to cloud software from spreadsheets in order to make the transition to MTD for VAT simpler. There are several benefits attached to moving toward the cloud. The cloud gives you greater opportunities to gain access to valuable live data and allows you to pull in bank transfers and transactions with ease. Upgrades occur automatically, and you can work and gain access to your key financial data whenever you need it, whether you’re one mile from the office or 1,000 miles away. As long as your device is connected to the internet, you can access this financial data.

Greater clarity for businesses?

Making Tax Digital was born out of the government’s aim to offer the most advanced tax administration around. The system is designed to make compliance more straightforward and will put an end to paper-based accounting for individuals and businesses up and down the country. It’s said that businesses will benefit substantially from the requirement to submit their tax every three months and that this will help them gain a firmer understanding of their needs and obligations. More than a million small businesses and accounting organisations are likely to be affected by MTD. Most desktop software products are unable to submit tax online, which is why it is so important to embrace cloud-based technology.

Professional MTD support and advice

The services of a reputable accountant can be the difference between hitting the ground running with Making Tax Digital and failing in your obligations. They can help you embrace the world of digital tax and accounting and help you find the right software solution for your requirements. It may seem tempting to bury your head in the sand and put off going digital for a little longer. However, this is only likely to lead to bigger problems. Making Tax Digital is more straightforward than you may think and can actually benefit you in a large number of ways, offering greater transparency and visibility around your financial affairs and enabling you to make more educated decisions when it comes to your business and securing its prosperity. Once you have gone digital, you can become fully compliant with HMRC expectations, remove the margin for error and rectify mistakes more quickly than ever before, whilst gaining access to analytics and valuable business data from anywhere.

The MTD pilot scheme

The government launched a pilot for Making Tax Digital for VAT in October 2018, inviting over half a million new businesses to experiment with it six months before the rules officially come into place. The scheme has also been created to save agents time, which can instead be spent on making the most of business opportunities and financial planning. The pilot was opened up to around 500,000 businesses with up-to-date, straightforward business affairs and was set to be made available for others in the near future. HMRC have paid close attention to customer concerns and have pledged to give those with more complicated needs more time to prepare, enabling them to test the service in depth before joining becomes obligatory. The government says the new system will make tax more “effective, more efficient and easier” for those that pay it. It is hoped that the pilot scheme will enable businesses to get things right at the first time of asking once MTD becomes official.

The growth of digital services

With so many businesses relying on digital resources just to operate, it’s no great surprise to see the emergence of Making Tax Digital. The government says the scheme has been developed to bring tax and VAT into the 21st century, with the initiative arriving years after individuals first started using digital services to pay bills and fulfil banking obligations. The initiative is centred upon enabling businesses and individuals to manage their income and expenses more successfully and dramatically reduce the number of errors made during tax administration.

Why Perrigo Consultants?

At Perrigo Consultants, we can come to your assistance if you are struggling to get to grips with Making Tax Digital and need more advice on what you need to do to ensure compliance. We offer jargon-free tax advice to keep your business healthy and ensure our clients are fully informed on their accounting obligations. Our client network is incredibly varied and includes medical professionals like physiotherapists and consultants, contractors such as IT professionals, architects, lawyers, QCs and more. We are expert tax advisers and accountants that can offer a bespoke, personalised service and are able to use our vast experience and expertise to help you overcome any accounting issues that you are facing, whilst enabling you to make the most of any tax opportunities that might be available to you.

Become more tax-efficient

We can help you ensure you’re paying the correct amount of tax, and we can offer advice on restructuring your business to make it as tax-efficient as possible. We offer a host of services for high growth businesses as well as individuals and provide valuable support and advice to a varied portfolio of clients not just around Worcestershire and the West Midlands but around the UK. Why not contact us today for a free consultation or to get more advice on preparing your business for Making Tax Digital? We are a professional, responsible business dedicated to providing the accurate and valuable tax and accountancy advice that you require to drive your business forward.

No hidden fees

We have a deep understanding of the issues and challenges faced by our clients and offer transparent fees with no hidden extras or nasty surprises. We can meet whenever and however you like and do everything in our power to help you stay in control of your finances. It’s much easier than you might think to change accountants – all you need to do is get in touch with us, give us the green light and we will deal with your existing accountant and HMRC on your behalf, taking care of all your tax and accounting requirements.

Our services

Whether you need help with Making Tax Digital, tax planning, accounts, self-assessment, VAT returns or bookkeeping, we can come to your assistance. We are committed to supporting the continued growth of your company, with many of our clients having approached us after receiving recommendations from others. As a leading chartered tax and accounting consultancy, we can help you strategically and operationally. We can provide you with the services of Virtual Finance Director on a short or long-term basis, offer tax advice before a sale or disposal, prepare business plans to help you secure loan finance and investment and assist you with due diligence procedures.

Getting in touch with Perrigo Consultants

If you need advice on paying the correct amount of tax without compromising on compliance and streamlining your accounting and bookkeeping processes, contact us today. We can take a close look at your business and offer you a range of ideas, explaining how each of these could offer substantial benefits to you and your business. You can get in touch with us today by calling us on 01299 488860 or by using the contact form on the website. Alternatively, you can send an e-mail to enquiries@perrigoconsultants.co.uk. We have over two decades of experience in the tax and accountancy industry and are confident we can provide the first-class tax and accountancy solutions that you are looking for. Why not take a look at the testimonials on our website to see what our customers have been saying about us? We are also a Xero Certified Advisor. Find out more about how we can help with Making Tax Digital by contacting us today.