In this episode Kevin and Graham chat about the changes coming up in the UK tax system that are going to make a big difference to the way UK businesses will file their taxes in the future. Making Tax Digital is the programme that Her Majesty’s Revenue and Customs (HMRC) are rolling out that will make the UK tax system the most technologically advanced tax regime in the world.
Making Tax Digital is coming along over the next 3 years, and is the next big thing to hit us after pensions auto- enrolment.
Tax is already digital to some extent – we all file our tax returns, whether personal, business or VAT online. MTD is much more than just online filing. The UK Chancellor’s budget speeches have mentioned simplifying or getting rid of tax returns, and that’s what Making Tax Digital is all about……. But only if you are an individual. If you are a business there’s a lot more to it, and you need to start thinking about it now.
Making Tax Digital for individuals
Government already receives lots of information from banks, employers, etc but doesn’t really do a whole lot with it that helps the average person. Making Tax Digital changes this and will mean HMRC put this info straight into your “personal tax account” which you can access online. You won’t need to give HMRC the information that comes from your P60, P11D, bank statements, gift aid donations etc.
So, the principal of Making Tax Digital is that information is taken from the various systems that hold it and it gets put into a personal tax account at HMRC.
Making Tax Digital for businesses
A good deal of the information HMRC will need to populate a personal tax account will come from businesses. Employers provide information about tax deducted from employees through PAYE and submit P11D with information about expenses and benefits. The first stage of getting ready for the personal tax account was getting PAYE submissions sorted. Employers use real time PAYE submissions rather than annual returns that were carried over from manual payroll processing. We are now 3 years into real time PAYE submissions.
The next stage that business owners see will be how you submit your business accounts to HMRC.
- The big change, an automatic API that sucks information out of your accounting software and into HMRC. You won’t prepare a set of accounts and then go into HMRC’s system to submit them.
- At the moment the submission to HMRC is annual, in future it will be quarterly.
We don’t know all the details yet. HMRC issued a white paper, followed by consultation. They have also responded to issues raised during consultation.
When will Making Tax Digital affect your business?
Due to come in in 2018 for larger unincorporated businesses, but the budget statement of a few weeks ago gave businesses under the VAT threshold an extra year, 2019. Companies then follow in 2020. So, for a lot of us, registered for VAT but not operating a limited company MTD is under a year away, and as far as most business owners are concerned it’s implications are a well-guarded secret. So the Making Tax Digital timetable is currently:
- 2018 – Schedule D income tax for businesses with turnover above the VAT registration threshold
- 2019 – Schedule D income tax for businesses with turnover below the VAT registration threshold
- 2020 – Corporation tax submissions from limited companies.
At the moment HMRC say Making Tax Digital won’t apply to businesses with turnover under £10k.
UPDATE (29 April 2017): SINCE THE SHOW WAS RECORDED THINGS HAVE CHANGED. THIS IS DUE TO THE SNAP UK GENERAL ELECTION. THE LAST ITEM TO BE RUSHED THROUGH PARLIAMENT BEFORE THE ELECTION WAS THE FINANCE BILL. THE PART OF THE BILL THAT WOULD HAVE MADE “MAKING TAX DIGITAL” LAW WAS REMOVED. THIS IS LIKELY TO DELAY THE PROPOSALS BY A YEAR, AND ITS UNLIKELY ANY BUSINESS WILL NEED TO FILE TAX DIGITALLY UNTIL 2019. http://www.telegraph.co.uk/news/2017/04/25/controversial-digital-tax-returns-delayed-dropped-finance-bill/
Will the way we pay tax change?
HMRC says Making Tax Digital shouldn’t change the level of detail of information they collect, or the payment regimes for taxes, but they haven’t given us a reason for wanting quarterly numbers.
What action do I need to take?
You will need to make sure your book-keeping complies with Making Tax Digital. Your book-keeping system will need to be able to talk to HMRC electronically and pass across the information HMRC requires every quarter. HMRC tell us that the current arrangements of keying information to an online form will no longer work. If you still use paper based record keeping in cash books or if you use a spreadsheet you will need to change what you are doing. If you have a old accounting package that doesn’t receive regular upgrades you may well need to change to a more up to date package.
The first indications from HMRC were that spreadsheets would be unacceptable in the future. HMRC have more recently indicated that they will supply a tool to extract information from a spreadsheet and pass it to the new Making Tax Digital HMRC systems. We’re not expecting to see anything thats particularly user friendly. We can see a lot of work needed to convert existing spreadsheets to match the HMRC tool.
HMRC have also indicated that they might make a very basic accounts package available free. Its likely that this will be unsuitable for all but the most basic of businesses. Kevin’s view, based on experience of HMRC’s real-time PAYE tools is that its likely to be great at providing the tax man with information but of little use to the business owner who needs good financial reporting thats able to give him insight about how his business is trading.
What accounting solution will you need?
If you use a modern cloud based accounting system such as Xero or Quickbooks you won’t need to worry. These systems will upgrade to become fully compliant with Making Tax Digital. Don’t expect this to be true of every accounting system. Some accounting software packages don’t deal with UK taxes very well at the moment. Freshbooks for example isn’t the choice of many UK businesses because it is developed in the USA and doesn’t handle UK VAT well. There is little evidence that a US centric supplier will put a huge effort into new UK requirements.
Kevin has stopped accounting with spreadsheets. He uses Xero for the businesses he is involved with. Xero is the first choice for many UK based practising accountants and has a huge UK footprint. He wrote about his reasons (Apart from Quickbooks sponsorship of Aston Villa) for choosing Xero in a blogpost.
Surely this is going to be expensive?
Chances are you will need to deal with your accountant once a quarter rather than once a year. This might increase the cost, but he will have a better flow of regular information. This will simplify the interaction, so in practice it might not cost any more.
You might need new accounting software. This will cost money. Most cloud accounting packages come with a cost of around £20-£30 a month. There is benefit from using cloud accounting. Since Kevin introduced Xero he has saved time. The focus of his own book-keeping has shifted from data input to generating information. Kevin wrote about this in another blog post. Kevin’s personal view is that cloud accounting is worth the money regardless of what the tax man is about to throw at us.
If you are thinking it might be time to get ready ahead of the changes then make sure you try before you buy. Most good packages will come with a 30 day free trial, Kevin took advantage of this before he finally took the plunge and signed up for a monthly subscription to Xero. Take a good look at whats in the market, read some reviews, ask for advice. Then decide. There are lots of options to choose from, so get the one thats right for you. Get ahead of the game and make sure your business is Making Tax Digital.
Where can you find out more?
What we know so far has been published on the HMRC website and you can take a look here
You can follow Kevin and take a 30 Day Xero Trial