The UK tax system is about to face one of its biggest changes: Making Tax Digital (MTD). But do you know how this will affect your business? Despite the importance of this initiative, many contractors are still unaware of what MTD is and how it will impact them.
As contractor accountants, we believe in doing our part to help you come to terms with MTD and its implications. For this reason, we’ve put together a guide that will help you to navigate this new regulation and bring you the peace of mind of knowing that you’re prepared for everything.
What is Making Tax Digital?
Making Tax Digital was first announced in the 2015 Spring Budget, and it’s designed to transform the UK tax system for individuals and businesses. According to HMRC, this initiative will introduce digital record-keeping and make the tax system more effective, more efficient and easier for taxpayers. The goal behind MTD is to help the HMRC to become one of the world’s most digitally advanced tax administrations.
After 1st April 2019, businesses will no longer be reporting their taxes once a year, but quarterly. This initiative is a major change; some businesses already file their VAT every three months but will now also need to record every transaction digitally on MTD-compliant accounting software (cloud or on-premise).
All businesses with a taxable turnover above the VAT threshold (which is currently set at £85,000) will have to utilise MTD-compliant software to store financial records and submit VAT returns. If your VAT-registered business has a taxable turnover below the threshold, you’re not obligated to opt-in to Making Tax Digital, although HMRC encourages you to do so.
You will need to keep certain information as digital records, including your business name, place of business and VAT registration number. You will also have to ensure the software used will allow you to show the audit trail between primary records and the VAT return. Details on supplies you made and received will also be preserved. These digital records will have to be kept for up to six years, so it’s crucial that you don’t delete anything during this time period.
From April 2020, it will be mandatory to use software to submit income and corporation tax, not just VAT.
Why is HMRC Implementing Making Tax Digital?
The idea behind MTD is simple. Make the tax experience easier and better for everyone involved, from contractors and SME owners to HMRC.
Doing this leads to another important reason behind the implementation of Making Tax Digital: the current tax gap. By making taxes easier, the government is hoping to minimise the risk of not collecting tax. HMRC estimates it’s missing £9.4 billion in tax revenue due to errors or improperly filled submissions; by ensuring all returns are digitised, the government believes it’s possible to tackle this non-compliance. By 2023, HMRC hopes to retrieve £4.8 billion of uncollected taxes.
There are thousands of contractors, freelancers and SME owners who still keep paper-based records or use Excel spreadsheets to keep track of their expenses or invoices. This, of course, can cause serious mistakes, such as lost documents and misremembered information.
However, after April, this will change, and businesses won’t be able to store information on paper or Excel. This means you won’t be able to submit your VAT returns through HMRC’s website either; if you’re still using a basic spreadsheet or something similar, you need to look into switching to an MTD-compliant alternative as soon as you can.
Benefits of Making Tax Digital
While MTD may seem like a big change, there are several benefits to the implementation of this initiative.
Tax updates will happen in ‘real time’, allowing you to always be aware of where you stand tax-wise. This has been designed to help prevent errors and tax due, and the HMRC will collect and process this information throughout the year. You’ll know how much tax you owe without having to wait until the end of the year.
All of your tax information and transactions will also be in one place, making it easy for you to stay organised. The new system will also save you time; there will be less documentation to fill out, because HMRC will be up to date with certain information.
Communicating with HMRC will also be simpler and faster, with both the government and contractors having an overview of all taxes in the same place. You’ll have the chance to make key business decisions at the right time and will be in a better position to budget for tax liabilities, as well.
Another important factor of Making Tax Digital is that you can interact with HMRC at a time that suits you. Your digital account will be linked to the government’s system, allowing direct communication between HMRC and your business.
Making Tax Digital is also meant to reduce paperwork and streamline the recording process, so contractors will have a more accurate view of their taxes. This is likely to lead to increased productivity and performance.
Concerns with Making Tax Digital
From online shopping to online banking, digitalisation and technology are now an integral part of our daily lives; the next natural step is for taxes to be digitised, as well. However, while over 1.2 million UK businesses will be affected by Making Tax Digital, around 400,000 businesses don’t even know they need to file VAT returns through MTD-compliant software from April 2019. This means there is some confusion in regard to what is expected to happen in less than two months; if this confusion is not clarified as soon as possible, these businesses could face penalties.
Slow Internet speeds will also become an issue once Making Tax Digital has been implemented. Given that an Ofcom study found that only one in four rural homes had access to broadband speeds of over 10 megabytes per second, it’s not difficult to predict the potential issues that may arise. Given that MTD will rely on connectivity, self-employed individuals and contractors will likely encounter difficulties when updating HMRC quarterly if their Internet speed is low
Many people are also concerned about the timing of the initiative. MTD is expected to be implemented from 1 April 2019, but this is also the date the UK will no longer belong to the EU. While there is a transition period in place until 31 December 2020, if we leave with a deal, this will still mean that businesses and individuals will struggle to keep up with these changes. This time frame is, without a doubt, a challenge, especially because the system will still be in the pilot phase.
It’s also expected that some contractors or businesses will find it difficult to transition from paper-based processes to digital ones. By starting sooner rather than later, you’ll have time to adapt to the new changes.
What About Non-Compliance with MTD?
Once April 2019 arrives, you’re expected to comply with Making Tax Digital, if you have a taxable turnover above the VAT threshold. Those who do not comply will incur a default surcharge, which will be in place until April 2021; after this period, the surcharge will be replaced by points-based late-submission penalties and late payment penalties.
If the VAT liability is paid by the due date, no surcharge is payable for the first default. Just by itself, late submission of a return won’t result in a default. The amount of surcharge owed will be calculated as a percentage of the VAT that’s unpaid by the due date. The percentage for the first late payment during a surcharge period will be 2% of the outstanding VAT; this fee will progressively increase to 5%, 10% and 15% for further payments.
If you have what the government calls a ‘reasonable excuse’ for failing to pay in a timely manner, you may be able to avoid the surcharge by sorting out the issue without excessive delay. Because HMRC doesn’t have a list of reasonable excuses, they will operate on a case-by-case basis. However, it has to be something that stopped you from meeting this tax obligation on time but that you then took care to solve.
When it comes to the points-based system that will replace the default surcharge, the government has announced that a point will be awarded for every missed payment, independently of what it is (VAT or corporation tax, for example). The points will expire after a determined period of compliance. You will have to pay penalties when you reach a point threshold on your submission schedule: two points for annual submissions, four for quarterly and five for monthly.
What is the Making Tax Digital ‘Soft Landing’ Period?
There are three rules at the core of MTD for VAT, which will be implemented with the new regulation in April 2019: your VAT records need to be kept digitally, your VAT returns have to be submitted to HMRC through MTD-compliant software, and if the software you utilise has several parts or solutions, these need to be digitally linked.
The ‘soft landing’ period, which was introduced early in the Making Tax Digital for VAT discussions, refers to the last rule. During the first 12 months after the implementation of MTD, HMRC will accept copy and paste of information as a digital link. This is meant to give time for businesses to update their systems by placing digital links between software programmes.
According to the government, a digital link is ‘an electronic or digital transfer, or exchange of data, between software programs, products or applications. The use of cut and paste does not constitute a digital link (except during the soft-landing period).’ It’s crucial that this time is spent switching to an MTD-compliant solution if you still haven’t done so.
FreeAgent: The Importance of the Right Software
In order to be MTD-compliant, the software you choose needs to be compliant, as well. Here at Gorilla Accounting, we work with FreeAgent, an accounting software that is on HMRC’s list of compatible suppliers of MTD for VAT.
In order to be compliant with MTD rules, the software you choose needs to be cloud-based. But what exactly does this mean? By being completely web-based, there is nothing to download, install or update, and you can access your information from your browser or smartphone. Security is key when handling financial data, and FreeAgent will keep your information safe and sound; you don’t have to be afraid of a computer crashing or accidentally deleting a very important file. All of your financial data is securely transferred to FreeAgent’s backup servers several times an hour.
With this software, you won’t have any hassle when submitting your returns; for the past eight years, FreeAgent has submitted digital VAT returns to HMRC on behalf of their clients, without a problem. You’ll able to track your expenses and income easily, and your transition to Making Tax Digital will be an easy and smooth one.
Why Should You Hire an Accountant to Handle MTD?
Just like with other big changes in legislation, it’s essential that you’re prepared for everything. Peace of mind is priceless and, by allowing an accountant to handle Making Tax Digital for you, you won’t have to worry about non-compliance. At Gorilla Accounting, our many years of experience in the financial sector and our vast knowledge of UK legislation allow us to adapt our practice to any changes made by the government.
By letting us handle everything, you have more time to focus on your business, instead of having to learn all of the ins and outs of MTD – or any other legislation, such as IR35. We also offer several useful tools you may want to take advantage of, like our contractor tax calculator. By choosing us, you also get access to FreeAgent, which will make your life that much easier.
With this fantastic bookkeeping tool, as well as Gorilla Accounting’s financial expertise to keep you compliant with all legislation, you can streamline and improve your business. Don’t wait for Making Tax Digital to come into effect – talk to us today, and we can help you get ready ahead of time.