Making Tax Digital — the next steps

With the deadline for businesses affected by the Making Tax Digital (MTD) fast approaching, what practical steps should your company take today? Dave Howell reports.

MTD is the Government’s initiative to make tax filing for all businesses fast and efficient, by using digital tools. From 1 April 2019, any business which is VAT registered will have to use MTD to file their returns. A minimal number of enterprises with complicated VAT affairs are exempt, but for the vast majority of businesses, this fast approaching deadline must not be ignored.

MTD will also roll out to encompass self-assessment and Corporation Tax, although this has been delayed until April 2020 at the earliest. The ambition is for every business and self-employed individuals to have an online tax account with HM Revenue & Customs (HMRC) which connects to their own digital accounting system to their tax records. This, in theory, should make filing returns and managing tax affairs more efficient.

With many businesses still using the shoebox method of accounting, or a simple spreadsheet to manage their accounts and tax, the shift to digital systems is a significant upheaval and one which needs to be approached with care.

Recent research carried out by Institute of Chartered Accountants in England and Wales (ICAEW) indicated that half of all small businesses had never heard of MTD, let alone the impending deadline. Now is the time to start your move to a digital accounting service which will not only enable compliance with MTD, but could also help you better manage your business as a whole.

How your business currently handles its accounts and tax recording will influence how you approach MTD. If you are already using one of the many online accounting services such as Xero, Crunch or FreeAgent, these services are ready to connect to MTD when VAT returns are due for filing.

Accountants are also gearing up to support their clients, so it is advisable to speak to your accountant as soon as possible about their plans to support MTD for their clients. Often, the accounting system they use can also be used by your business. This existing knowledge can ensure the transition to digital accounting systems is smooth and efficient.

Businesses who do not use accounting applications or have paper-based accounts will see the most disruption. Again, speak to your accountant about their plans and how they can support your business as it transitions to digital accounting and tax filing.

New accounting

FSB’s Policy and Advocacy Chairman Martin McTague states: “The key is to shop around. There are many providers out there now and finding the right software or cloud platform for you could well take time.

“The more complex your accounts, the higher the likelihood that you’ll need a more sophisticated software programme. There are lots of cloud platforms that are intentionally designed for smaller firms.

“Speak to as many people as possible: providers, accountants, and other business owners to get a sense of the different approaches out there.”

As there are many tax and accounting services to choose from, what criteria should small businesses use when selecting the right service for them?

“Ease of use and cost will be high on the priority list for a lot of small business owners. 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 to you with are fair. Speak to other providers and — if you do want to stick with the firm you currently use —challenge them on price if you feel it’s necessary. Chances are they won’t want to lose you.”

What are the pitfalls small businesses should watch out for when moving to an MTD ready accounting service?

“As with any contract, it’s vital to check the small print. You don’t want any nasty surprises like unexpected price hikes or restrictions on switching to another provider.”

Is the transition from “spreadsheet accounting” to hosted systems as seamless as many services seem to say it is?

“Spreadsheets still have a role to play beyond April. As long as you can find a way to pull the relevant information through the new MTD Application Programming Interface (API), there’s nothing stopping you using spreadsheets to stay across VAT inputs and outputs. What’s more, HMRC is allowing a one-year window for businesses to continue copying and pasting VAT information direct from spreadsheets into MTD-compatible platforms.”

Tax in the cloud

The number of applications and service providers who support MTD is bewildering. The Government maintains a list here. Choosing the right one for your business needs careful consideration.

It’s important to understand that MTD may initially be for VAT filing, but this is just the start. MTD will eventually affect all business and self-assessment taxation. The aim is to push businesses to digitise their records and connect them to their online tax accounts.

The key is to look at your business and how complicated its accounting and tax affairs are and match these to an online accounting service that can help you digitise these records. Once this digitisation has taken place, connecting to MTD should be straightforward.

If your business is VAT registered, you need to act now if you do not fall under any exemptions. However, even if your enterprise is not registered for VAT at the moment, it is still a good idea to move to digital accounting as soon as you can. This will allow you to practice using these applications. Eventually, all businesses will fall under MTD. It is best to make a move now and use the expertise available to resolve any technical issues you might have. MTD should then become a smooth migration.