In case you haven’t already heard, or you’ve buried your head in the sand, the tax system is undergoing a major shakeup.
In April, most VAT-registered businesses with a taxable turnover of £85,000 were required to keep digital records using approved software and file their tax returns online with Making Tax Digital.
However, some business types were deferred to a 1 October start date for Making Tax Digital. These include businesses required to make payments on account and not-for-profit organisations.
Billed as a more simple and effective way to manage tax payments, it’s nevertheless giving some businesses cause for concern.
To help separate fact from fiction, Tony Mills, tax expert and director of Online Tax Rebates, dispels some of the most common myths about the Making Tax Digital (MTD) programme…
1. You don’t need to worry if you already file your tax returns online
If your company already uses one of the more popular branded software accounting packages, such as Xero, you shouldn’t have to make any drastic changes to comply with Making Tax Digital.
However, this does not apply to all businesses who file their tax returns online. So, in good time for the deadline, check if your current software package is compliant with the new rules.
The onus is on your business to research and find suitable software, as HMRC itself will not provide this service.
2. If your turnover is under £85,000, you don’t need to act
If your business’ turnover exceeds the £85,000 threshold, you have no choice but to comply with Making Tax Digital.
However, don’t sigh in relief just yet. If your business falls under this threshold, you will have an extended period (up to April 2020) to make the necessary arrangements. Rather than delay the inevitable, it may pay off to switch to digital record keeping now, giving you peace of mind.
Even if your company falls below the £85,000 minimum requirement, you still need to monitor your monthly turnover as, should your business tip over the £85,000 mark, you will have to comply (that’s even if it drops under again subsequently).
3. You can leave it till nearer the deadline
It’s a common misconception that you don’t have to give much thought to the Making Tax Digital switchover before October, or even the following deadline in 2020.
Time really is of the essence here. Having enough time to familiarise yourself and your employees with new processes and software is important. It’ll also give you an opportunity to smooth out any issues before any errors could cost your business in fines or disciplinary action.
4. It’s your accountant’s responsibility to upgrade
While it’s true your accountant (if they are registered as your tax agent) will be able to use their own MTD-compliant software to file your VAT return, you will still need to create a digital link from your data to theirs.
If you undertake your own bookkeeping, you may need to invest in new software.
Remember, MTD isn’t just about giving your tax return a digital makeover, it’s about keeping all your records digitally, so you will have to research and ensure this change is being implemented yourself and not just rely on your accountant.
5. It’s unlikely there will be financial penalties for non-compliance
We all know how difficult it can be to adapt, and while HMRC has confirmed there will be a grace period for record-keeping failures until March 2020, businesses still need to recognise the potential repercussions of failing to comply.
There will be a points-based system of late filing penalties which focuses on penalties for those who consistently file late as opposed to compliant taxpayers who occasionally miss a deadline.
These fines are likely to correspond with HMRC’s pre-existing record-keeping penalties, which are typically between £500 for the first offence and up to a maximum of £3,000 for repeat offenders.
6. Digital accounting is technology for technology’s sake
You can be forgiven for thinking the move to digital accounting is a change for no good reason. After all, traditional bookkeeping methods, have served SMEs well so far.
However, digital accounting is one change that does have tangible benefits. For instance, adopting a cloud-based accounts system can offer greater transparency and can optimise business processes.
You can scan receipts in, log on to the system remotely, as well as receive real-time data so you no longer have to wait until the end of the year to find out how much tax you have to pay.
Digital accounting is a way of future-proofing your business, so it’s important your company embraces the change to ensure it remains competitive in an increasingly digitalised world, even if you turnover less than £85,000 a year.
By Tony Mills, director, Online Tax Rebates