Business Law & Compliance

Tax is going digital, here's how to prepare for it

7 min read

15 February 2019

Attention all SMEs: Tax, like all other things in life, is going digital. Make sure you and your business remains compliant whilst these changes are being made. Here's my advice for you.

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world, but how does it hope to get there?

The answer is through the introduction of Making Tax Digital (MTD), it’s one of the first processes to be implemented in the digital overhaul. However, “changing the process” in any business is often daunting, time-consuming, and comes with an additional cost.

Due to the criteria of MTD, transforming the way VAT is submitted digitally, it will be SMEs (along with VAT registered sole traders) that will be hit the hardest, and especially those that have previously kept manual records as they will need to engage on the technical side in order to be compliant with MTD.

Who does MTD apply to?

MTD applies to those whose taxable turnover is more than £85,000 for the 12-month period ending 31st March 2019 and every rolling 12-month period thereafter requiring and, with the deadline fast approaching for MTD VAT, SMEs must get on board with digitisation. So, what do SMEs need to consider to be MTD ready?

Who should be MTD compliant?

If you’re registered for VAT and your taxable turnover is above the VAT registration threshold (currently £85,000), you will be required to keep digital business records and send your VAT returns to HMRC using MTD compatible software.

HMRC has opened a pilot scheme which will help organisations prepare for the changes sooner.

How complex is your operation?

A decision has been made that more complex businesses will have a six-month deferral to the start date.

VAT registered businesses with turnover below the VAT threshold (i.e. those that have registered voluntarily) can continue to maintain their accounting records and file their VAT returns as they do currently, at least until 2020.

If your taxable turnover falls below the threshold after 1 April 2019 you will still be required to keep digital records unless you de-register for VAT.

How do I begin?

The first step to take is to register through your existing Government Gateway account for MTD. If you do not have an account you will need to register, remembering to allow time for the activation code to be sent through the post.

When you need to file your first return will depend on what your VAT quarters are. The first return will be the first complete quarter that falls after the 1st April 2019, i.e. If your VAT quarter is January to March, the first return to be filed using MTD will be April to June ‘19 return, deadline for filing due 7th June 2019.

If your quarters are February to April’19, the return May to July’19 will need to be filed using MTD. To clarify, it is the first complete quarter that falls after the 1st April 2019.

Choosing the right software

How an organisation approaches the selection of MTD compatible software will depend on their existing level of technology maturity and their business model.

There are several Accounting Software providers that are HMRC approved, offering discounts to entice companies and sole traders to sign up, and assistance and training sessions in implementing and using their software.

During this time, ensure that staff are supported through this transition, offering sufficient training and access to the software provider’s customer support line.

Ensure that the software is easy to use as well as priced fairly. Cloud based applications can be connected via other digital devices making them more accessible and increasing their functionality and flexibility.

What if I’m using pre-MTD software?

If you’re currently using accounting software, then ensure that it’s MTD compliant and meets the MTD requirements. Considering all options is vital. If you’ve been using the same software provider or accountant for years, don’t assume that the upgrade quotes they provide, are fair. Speak to other providers and — if you do want to stick with the firm you currently use —challenge them on price if necessary.

If the organisation still wishes to use spreadsheets, they could consider using a bridging software application which extracts the data from the spreadsheet and uploads it to HMRC.

The spreadsheet will need to be either API enabled or used in combination with an MTD compatible software product to enable the data to be sent to HMRC.

But not all accounting software providers have bridging software in place, making it merely a stopgap for SMEs struggling with online accounting and a cheap alternative to completely digitising their accounts.

In the long term it would be worth considering investing in one of the approved Accounting Software providers and transfer their record keeping becoming digital.

What are the potential penalties under MTD?

Whilst HMRC has introduced a ‘soft landing’ on penalties for the first 12 months, these are only relating to the digital links for transferring of data between software programs or applications.

No surcharge is payable if the VAT liability is paid by the due date, but the current surcharge process will still operate – making it more important than ever to ensure you’ve done your due diligence and you’re MTD ready for your next VAT submission in April.