Managing Your Cash Flow
Making Tax Digital: Why it could transform your finance department for the better
8 min read
15 March 2019
Like it or not, tax processes are about to go completely digital. My view is that concerns surrounding this transition come from fear of the unknown rather than anything else. SMEs should embrace this digital transition, as it could revolutionise the way they tackle their finances – and for the better. I break down the perks of taking tax digital.
What is Making Tax Digital? On 1 April 2019, the Making Tax Digital (MTD) regulation will be brought in by the government meaning all VAT registered businesses with a taxable turnover above the VAT registration threshold, (£85,000), must keep their records digitally and file VAT returns using HMRC compatible software.
Why has it been brought in?
This latest legislation is part of HMRC’s long term ambition of becoming one of the most digitally advanced tax administrators in the world.
The aim is that this MTD will make it more efficient, more effective and easier for taxpayers to get their tax right.
Currently, many people find getting tax correct too complicated, with avoidable mistakes costing the Exchequer over £9billion annually. Digital records will reduce the amount of tax lost to these errors and make the process easier for those dealing with VAT returns.
This is just the first step as the government looks to change taxes over the next few years. However, MTD will not be mandated for other taxes until at least April 2020, but businesses can get involved in the Income Tax pilot now on a voluntary basis.
How do companies comply?
To comply to MTD, from 1st April 2019, mandated businesses will need to keep their business records digitally and file their VAT returns via HMRC’s new digital platform by using dedicated and compatible accounting software or a combination of software packages or spreadsheets.
From April 2020, data must be exchanged digitally between all software used by a business for VAT
With the MTD legislation, the onus is on submitting tax returns to HMRC via a company’s finance system as opposed to directly on a manual basis. More than ever, it is crucial that the data within a finance system is clean and accurate. Digital systems support this by automatically posting clean, accurate and verified data directly into a finance system – thereby eliminating human error.
Are there any benefits to businesses?
MTD provides a great driver for companies to assess their current financial and accounts processes and evaluate if automated systems may benefit them in terms of cost savings and reducing errors.
This combined with more MTD legislation planned and existing regulations in place such as reporting on late payments mean companies can’t afford to ignore digital solutions when it comes to accounts processes.
It’s worth looking at why traditional methods are prohibiting accounts payable (AP) teams and why digitising can bring a multitude of benefits.
The problem with paper
It almost seems hard to conceive that many AP teams still use a paper-based system to log, process and approve invoices.
This approach is outdated and has multiple issues that can delay the time it takes to process an invoice. Problem areas include spending time searching for lost or misfiled invoices, printing and physically filing the invoice and then system input time.
The duplicated invoices issue
Duplicated invoices cause AP teams a headache. When invoices aren’t processed on time, suppliers will often send the invoice again when chasing payment. This often results in the invoice being processed twice and creating additional time as it has to be investigated and the second payment has to be stopped.
The main pain point in getting invoices approved is the limited number of team members with the authority to sign them off. If only one or two senior team members are authorised to sign off invoices it can create a backlog and add time to the processing. Even with some automated software systems, it requires the authoriser to be at their work computer to approve.
Human error is unavoidable but also very costly to businesses. It can cause incorrect dates or amounts to be input and therefore delay the process or create even more work for busy teams.
With all the drawbacks of paper-based systems and the MTD and late payment regulations in play now is the ideal time to seek digital systems to negate as many of the pain points identified above.
One of the key aims of the MTD initiative is to reduce error in the recording of accounts and the filing of tax returns. Whilst MTD focuses on digitisation of the returns, the entire accounting process from start to finish is prone to error.
The rubbish in, rubbish out principle is particularly apt. Organisations should consider how they can digitise the input of invoice data through the use of Accounts Payable automation software to eliminate errors associated with manual data input and manual invoice validation.
Automated AP systems
Automated AP systems prevent the need to print and file as well as manually input the information. An automated system digitises invoices, extract and validates the data for direct insertion to the target finance system, increasing accuracy and making the invoices very easy to locate for busy teams.
Moreover, it completely eliminates duplicates as the system will automatically alert you of any you may receive, ensuring no time is wasted in processing the same invoice.
Thank goodness for digital solutions
Digital solutions now mean that approvals can be completed remotely using cloud access, meaning there is no longer a delay whilst the authoriser gets to their desk. And the automated system eliminates the errors associated with the human touch.
What is clear is that the Government means business when it comes to digitising tax, but also making sure companies have clear records of all transactions, as well as the ability to prevent late payments to suppliers.
Combining automated AP systems with software to file VAT returns means that companies will now have a more holistic approach to automated systems.
– And whilst legislation and compliance can often be seen as more work in terms of admin and time – investing in automation will speed up the process, cut costs and reduce errors.
James Smith is UK sales manager at Kefron