HMRC estimated that they lost out on around £10bn of VAT in the tax year 2018-19 – a significant percentage of overall VAT revenue.
MTD is HMRC’s 10 year programme to combat this tax gap. It aims to digitise, and to some extent standardise, the tax system to improve accuracy, reliability and efficiency.
It’s a complete modernisation of the tax system which aims ultimately to make it simpler for all involved. It is one of the biggest ever changes to the UK tax system.
MTD Rollout
MTD was first announced in the Spring Budget in 2015. Since April 2019 all businesses above the £85k VAT-threshold already had to file their VAT returns using MTD-compliant HMRC-approved accounting software. Tax had to be reported quarterly instead of annually.
From April 2022, 1.1 million VAT-registered businesses that fell below the £85k threshold for annual turnover were impacted and also had to file their returns using HMRC approved software. Many of these businesses will be the smallest to be affected, including landlords and the self-employed.
The next stage in the rollout happens in April 2024 when MTD for income tax self-assessment becomes mandatory. This means that all landlords and businesses with a combined turnover of £10k or more must submit their ITSA using MTD compliant software.
Challenges of MTD
It’s widely accepted that the early phases of Making Tax Digital (MTD) have been a difficult period of adjustment for many small businesses, and future phases of the rollout will likely be challenging too. This is partly due to a reluctance to change processes that have been in place for many years, and partly due to the challenge of having to learn and adapt to new systems and processes.
Some businesses will also be more impacted than others. An IT Contractor, for example, will be tech savvy and will have no issues adjusting to using new software. They might even have been an early adopter that had made the switch before it became mandatory.
But many other small business owners might not be tech-fluent and will struggle to adapt to new software.
With every challenge comes an opportunity and the changes that have to be made to become MTD compliant can offer significant benefits to your business.
Benefits of MTD
If a contractor or small business didn’t embrace MTD and continued to use paper-based methods, ultimately they would risk breaking the law. Not to mention spending a lot more time on their bookkeeping than they needed to.
A bridging tool could be used to ensure MTD-compliance. Bridging tools use an API to connect non-compliant software such as Microsoft Excel to HMRC’s tax systems.
If you use Excel and bridging software to submit your returns, you will have to put in significantly more effort compared to those who use dedicated MTD-compliant bookkeeping software such as FreeAgent.
But to continue with either paper-based accounting or using a bridging tool would mean being at a serious competitive disadvantage when compared with companies that have adopted dedicated MTD-compliant software.
Last year HMRC conducted a survey of over 2,000 companies regarding their switch to MTD. The survey found that 69% of businesses experienced one or more benefits from switching to HMRC-approved software. 67% of respondents found that in one or more aspects of bookkeeping, statement preparation and the tax returns process, MTD had reduced the potential for errors.
But what are some of the other benefits of fully committing to MTD with dedicated software?
Get Financial Information In Real-Time
Good MTD software will enable you to get an at-a-glance overview of your tax and financial situation throughout the year. You won’t have to wait until tax return time or manually update a spreadsheet to get your current position. Information is updated and displayed in real-time with key information displayed on a dashboard which can be viewed on any device with internet access, including a dedicated mobile app.
This means you’ll be able to better understand what you owe and will be in a better position to get your affairs in order before the tax returns submission deadline arrives. You can also avoid any cash flow issues with inbuilt forecasting functionality.
Balance sheet reports and profit and loss statements can be quickly and easily generated enabling you to easily get a snapshot of the financial health of your business at any time and make decisions based on current data. Inbuilt reports will help you understand trends and patterns that impact upon your business over time.
Less Paperwork To Deal With
Nobody enjoys sifting through piles of invoices, receipts and documents. MTD software has inbuilt technology that allows you to upload photos and scan invoices and expense forms which are securely stored as digital records meaning the paper copies can be disposed of. This means there won’t be mountains of paperwork to wrestle with come tax return time, or a late night search for missing invoices and receipts.
More Time To Focus On Your Business
MTD compliant software automates many laborious tasks which can save you a significant amount of time. The time taken to complete admin tasks that might have previously taken days or many hours can be massively reduced. Once onerous tasks can be completed just with the click of a button.
Just a few examples are that VAT returns are generated automatically and can then be submitted digitally to HMRC with a button click. Your self-assessment liability and tax returns are calculated and prepared automatically in the background. Bank reconciliation is a breeze with automated feed imports and categorisation. Automated invoices and payment reminders can be sent to your customers.
Time is money for small business owners so the less time you spend on your accounts the more time you can spend on your day to day and growing your business. The advantages of digitisation and automation using dedicated HMRC-approved bookkeeping software cannot be overstated.
How Gorilla Can Help You
Here at Gorilla Accounting we’re expert MTD accountants and proud Platinum Partners with FreeAgent. We provide full FreeAgent access to all our clients included at no extra cost in our great value fixed monthly fees. FreeAgent is the industry standard MTD-compliant bookkeeping tool. Give us a call on 0330 107 9674 or request a call back to discuss how we can make accounting easy for you.
