Making Tax Digital is coming (slowly but surely)
In the 2015 budget the then chancellor George Osborne announced he had tasked HMRC to perform a long overdue overhaul of HMRC’s digital systems. The government wanted HMRC digital tax-records system to be the best in the world. HMRC’s response to this challenge was their Making Tax Digital (MTD) proposal.
In brief the MTD proposal is:
- All business taxpayers have one HMRC record where all their tax records are held
- Annual tax returns to be abolished and replaced with top line accounts submitted to HMRC every quarter
- At the end of the tax year full accounts with all tax adjustments to be submitted to HMRC
- Accounts must be filed on HMRC-compatible digital software such as XERO, Quickbooks, Sage Online etc
- HMRC software will be able to read the accounts, check for abnormalities against national trade averages and the taxpayer’s previous accounts and automatically reject any unusual entries or errors
This is an ambitious plan. The government has set aside £1.3 billion to implement it, yet the implementation date has been put back several times.
The latest dates are:
- April 2019
Digital submission of quarterly VAT returns for businesses over the VAT turnover threshold (currently £85,000). This means business over the VAT threshold from April 2019 will have to submit their VAT returns via HMRC compatible software such as XERO, Quickbooks, Sage online etc. They will not be able to use the HMRC VAT portal to enter their VAT returns.
Businesses under the VAT turnover threshold that have voluntarily registered for VAT registration will continue to use the HMRC VAT portal to submit their quarterly VAT returns unless they wish to apply to submit their VAT returns by HMRC-compatible software from April 2019.
I believe this is a mini trial whereby HMRC can test how their software handles just VAT returns before they implement full-scale quarterly account submissions scheduled for April 2020.
- April 2020
From April 2020 all businesses (Limited, Partnerships, Sole Traders, Landlords with over £10k pa gross rental income) will have to file their accounts digitally, every quarter on HMRC-compatible software.
Currently businesses pay their VAT bills quarterly, Limited Companies pay their corporation tax liability nine months after the company’s year-end, and Sole Traders and Partnerships pay their income tax liabilities in January and July.
HMRC have said they have no plans at present to change these payment dates but businesses may voluntarily pay their tax liabilities quarterly in line with their quarterly accounts.
The accountancy profession appears split on MTD, with half positive and the other half negative.
Personally, I am totally in favour. HMRC receive a lot of bad press: they make mistakes, they query returns from two or three years ago and they ask for information they have already had. While all of this is true, I believe there are two main reasons:
- The volume of data received by HMRC every day is enormous
- HMRC are working with old siloed systems that do not interface with each other
I believe MTD, once bedded in and working properly, will greatly improve HMRC’s efficiency and ultimately improve their service to their clients, us the taxpayer.
Also, I believe MTD is an opportunity for businesses to improve their performance by updating their accounting systems and using modern technology to drive their business forward. There are some wonderful cloud- based accounting software packages available, allowing you to work with your accountant in a different, cost effective, more professional and up-to-date way.
Packages like Receipt Bank allow you to photograph your purchase receipt on your mobile phone, upload it to Receipt Bank which will scan and code it into your accounting system automatically. Now that HMRC accept photographs as proof of purchase, once you have captured a legible image of the receipt, you can throw away the paper copy and rely on the photograph held in your digital records.
XERO, Quickbooks and Sage online are all cloud-based accounting packages. You can store your data online (in the cloud) and whoever you grant access to (your accountant/staff) can access it via computer anywhere. These systems also have apps, letting you access your software via your mobile phone. You could therefore raise a sales invoice on your mobile phone while you are at your customer’s premises and email it to them or take a photograph of your purchase invoice while at a supplier’s, input the transaction on your mobile, and upload the photograph. Bingo, the book-keeping’s done! Most cloud- based accounting systems also integrate with your bank, receiving feeds from your bank. In a nutshell, your bank automatically exports your business transactions into your accounting software. All you have to do to complete your book-keeping is match or code the transactions.
Most accountants will support all cloud-based accounting systems, as we do at BKPS. However, we felt BKPS should provide full support to clients and become experts on a favoured accounting software. This support covers initial set-up of the software including uploading logos etc, training and telephone support (most cloud-based systems only have online support). We reviewed all the packages available and decided BKPS would support XERO and become XERO partners and champion trainers.
Also, in this age of technology, accountants need to appreciate that clients’ needs differ:
- Some clients want to stick with their current book-keeping arrangements. Although the frequency and cost of the book-keeping will increase (mandatory quarterly digital accounts), accountants should be able to accommodate this, using in-house software to submit the client’s quarterly digital accounts without too much disruption for the client.
- Other clients may choose to go digital to gain efficiency of book-keeping for themselves. These clients will then have to choose what level of support they require from their accountant. For example, BKPS currently offers three service levels:
- Compliance level
Currently this covers annual accounts and tax returns (but under MTD this will move to basic quarterly digital accounts with fully reconciled annual accounts and associated full tax adjustments).
- Business level
This is quarterly reporting, usually in line with VAT quarters. We provide quarterly accounts reconciliations, quarterly Profit & Loss account, Balance Sheet, Aged Debtor and Aged Creditor reports as well as the quarterly VAT return. Also, a quarterly review of potential tax liabilities enabling the client to plan financially for all future tax liabilities. This helps clients monitor their business performance more frequently and keep on top of their business.
- Virtual Finance Director level
This is full control of your business. It’s designed for clients who want to build and drive their businesses forward. This includes annual business planning and budgeting, revised quarterly forecasting, monthly performance reporting against budget/revised forecast with variance analysis and cash-flow forecasting. Also, tax liabilities are forecast and updated monthly.
- Compliance level
One word of warning on MTD and cloud-based accounting software: I have noticed a recent trend whereby both HMRC and software providers are saying that it’s easy to do your own accounts and tax returns.
Unless your business affairs are straightforward, and you have the time to do it yourself, I would strongly advise you to stick with your accountant. They will ensure you meet your legal responsibilities, reduce errors, maximise your tax savings by claiming the correct tax allowances and help you avoid costly HMRC penalties.
Talk to your accountant today and plan for your future. Ensure your business is ready for MTD and take full advantage of the technology that is available.
Burton Mail – Wednesday 18 April 2018. Next month we will look at GDPR.