Your go-to guide to Making Tax Digital
Hi, today I'm here to talk about Making Tax Digital (MTD) and using it as a platform to grow your business. I'm Paul Layte, CEO and founder of Next Level Business, the Growth Accountants.
As with any change, it's firstly really important to get the mindset right. You can view it as a glass-half-full activity or as a glass-half-empty activity.
From the 1st of April 2019, if you're a VAT-registered business turning over £85,000 or more a year, you need to keep your records digitally. That means using software (probably cloud software) to keep your business records. You’ll then need to use that software to submit your VAT returns as you always have done on a quarterly basis, but this time in an MTD format.
That is really it when it comes to MTD.
What would the benefits be to my business if I could digitize all of my financial records?
If we look at this as a glass-half-empty activity, really what we're saying is that this is a different way to submit the same thing you were doing before, and it doesn't really add a significant amount of value to your business. Therefore, it’s better to look at it as a glass-half-full activity and think, "What would the benefits be to my business if I could digitize all of my financial records?"
If you could, at any given time of the day, put your fingers on the latest financial information for your business, would that be useful?
If you could log into the software, collaborate with other colleagues and employees in your business about what's going on, would that be useful?
If you could talk to your accountant in real time about what's going on in your business, the challenges you're having, and some things that might be able to improve your performance, would that be useful?
If you could see who's paid you for the work you’ve done and who hasn't on a daily basis, would that be useful?
There are so many benefits to going digital in a business. It's not just about having to submit new records to HMRC digitally. If you really want to make the most of it, think about how you can embrace the change, how you can move to digital, and how you can really use it as a platform to grow your business.
The Key Date for Making Tax Digital
The key date for Making Tax Digital was the 1st of April 2019. This date concerns all businesses that are turning over £85,000 or higher, which is the VAT threshold.
From the 1st of April 2019, any VAT period that ends after that date will need to submit a VAT return in MTD format. After everybody's transitioned to MTD for VAT, HMRC's intention is to bring in other taxes later on, such as corporation tax and income tax. This could be as early as April 2020.
So, getting the transformation and the change to go digital for VAT in 2019 will be absolutely crucial to make sure you're well prepared for the changes coming down the track soon.
What happens if you don’t comply with Making Tax Digital?
What are the consequences of non-compliance with the Making Tax Digital for VAT regime?
Well, there’s both the carrot and the stick.
HMRC have said that they're introducing a new points-based penalty system for those not complying with the new regime. This means, a bit like your driving license, you'll collect points as you go for misdemeanors under the MTD regime. This might be filing it late, or not filing it at all, or filing it inaccurately. And if you convert or collect a certain number of points within a period, they will levy fines.
The other penalty regime is if you’re late submitting that VAT return. Like in previous VAT regimes, there will be interest and penalties levied for not submitting them on time.
There are a couple sticks that HMRC have used to encourage you to submit your MTD return on time and accurately.
The carrot is as follows: if you don't convert your business to digital records, what are you missing out on?
What are the benefits that you're not going to be able to deliver to your business?
Those benefits involve:
- additional productivity
- additional efficiencies in your business
- the freedom to work from anywhere
- the ability to get your hands on information that's up to date for your business
- see who's paid you
- see who hasn't paid you
- check your bank balance easily
If you're not reaping these benefits of moving digital, you're really missing out and missing the point of moving to MTD.
So, there is a carrot and there is also a stick. We focus here at Next Level Business on how we can use MTD and the digital transformation as a growth platform for your business.
Impact of Making Tax Digital on Businesses Manually Submitting VAT Returns
If you’re manually submitting your VAT returns at present, what is the impact of MTD on your business?
Well, that's going to be a wider change for you and your business. The recommendations I would have are as follows:
First of all, if you've got an accountant, engage with them and talk to them about what you need to do, and get their help. That's really going to be your first port of call. They will, no doubt, advise you that selecting appropriate software, if you haven't already made your choice, is the first port of call for your business.
After you've selected the appropriate software for your business, you need to start using it. You may need some help from your accountant or your bookkeeper to convert over to that software. Once you've done that, you'll need to start managing and collating your business records digitally for the whole of the quarter that ends after the 1st of April 2019. You'll also need to opt in to the MTD regime in your HMRC portal for your business.
Once you've got the software, you've opted into the regime, and you're using it, you'll then be in a great position to be able to submit your first Making Tax Digital VAT return. You'll also be in a great position to maximize the benefits of going digital for your business.
Impacts of Making Tax Digital on those using software
What I mean by software is online cloud accounting software to manage your business records. If you're already doing this, you'll need to go to the HMRC portal, and you'll need to opt in your business to the MTD regime. That should be in your HMRC online portal.
Once you've done that, you need to check the compatibility of your software for MTD. Xero, QuickBooks, and others will already be MTD certified. You may need to opt in to that in your software. So do check that out.
Once you've done those two things, you then need to make sure that you're keeping digital records for your business for the whole of the quarter that you're going to be reporting. If you do that, at the end of the quarter, you'll be able to submit an MTD return in place of your previous VAT return.
Busting the Myths around Making Tax Digital
“If you're already using the HMRC Government Gateway to submit your VAT returns, you don't need to do anything”
This is not true. For those businesses affected by MTD, your existing way of submitting VAT returns will disappear from the 1st of April 2019. This will be replaced by the MTD regime, which comes in on the same date. Make sure you're ready and not caught out by that change.
“HMRC are going to provide free business software for you to be able to do your MTD returns”
This isn't the case. HMRC are looking for you to adopt commercial cloud accounting software for you to run your business on, and you’ll also need to submit MTD returns to them. Look for software that is suitable for your business to run on.
"It doesn't affect me. It's not coming in until 2020"
For the majority of VAT-registered businesses and for those turning over £85,000 or more a year, the MTD regime will come in from the 1st of April 2019. It's only businesses that are below the £85,000 threshold and still VAT-registered, that come in a little bit later in April 2020. There are over a million businesses that are within the scope of MTD from the 1st of April 2019. Make sure you're ready for it.
"Paper records are sufficient"
Paper is not going to be compatible with MTD. The idea is that you’re going to be keeping your business records in a digital fashion, so you can submit your VAT returns digitally to HMRC. Paper is out and digital is very much in.
“My accountant or bookkeeper will sort it all out for me”
That may be the case, and they're going to be a great source of support during this change for you, but make sure you engage with them, Make sure you have an MTD plan for your business, and certainly, if you're not already transitioned onto cloud accounting software and keeping your business records digitally, talk to them as soon as possible about making that happen for you.
“Businesses will have to report more frequently to HMRC under the MTD regime”
This just isn't the case. MTD will be on the same frequency as the existing VAT returns. That means, for the vast majority of people, you'll be doing a quarterly Making Tax Digital for VAT return in place of your old VAT return that you would have done quarterly anyway. It will not be more frequent, but rather a change of how you're doing it.
The benefits of Making Tax Digital
If you're reading this and thinking, “How can there be any benefits to making me do something new, making me change my business and submitting my returns digitally via MTD?!”- you may well be not alone in those thoughts.
Of course, any legislation changes where you need to do something different is a little bit painful and there is a little bit of change involved. So inherently, just by submitting your VAT returns digitally, is there any real benefit? Well, there is, actually.
Depending on the software you're using, you will get enhanced functionality, and more visibility on your VAT returns. You'll be able to see your balance in your accounting software and what you owe on VAT. This will help you get a bit of comfort that you are in a good position on MTD.
Focus on the "D", the digital piece, of MTD.
Going digital in your business has benefits beyond just submitting VAT returns digitally. If you digitize your business, you should be able to use that as a platform for growth, for collaboration, and to drive additional efficiencies and productivity out of your business. That, for me, is really the greatest benefit of MTD.
- Imagine if you could see the up-to-date financial information on your business at any given time, what would that be worth to you?
- If you could see who has paid you and who hasn't paid you on a daily basis, what would that be worth to you?
- If you could have a really good conversation about your business performance with your accountant or with your bookkeeper, what would that be worth to you?
I think you'll find that actually going digital provides your business with a platform for growth going forwards.
5 Top tips for Making Tax Digital a success
- Understand how to be compliant
You need to know whether you're going to be subject to the MTD regime or not. If you're a VAT-registered business turning over £85,000 or more from the 1st of April 2019, you will need to submit MTD for VAT returns instead of the traditional VAT return that you’ve probably been doing so far.
- Understand how to get the most out of this digital transition
That doesn't mean just doing your VAT returns in a slightly different way. It means understanding moving your finances to a digital way that could benefit your business, for instance in gaining productivity benefits, collaboration benefits, and the new and efficient ways of working that doing so can unlock.
- Take action
Convert over to digital, leave the paper behind. You need to do that for the entire quarter where you're going to be submitting a VAT return. Take action - convert, leave paper behind and move to your new digital software and digital way of working.
- Make sure you've got the right support to help you make the transition
That support will probably come in two forms: either from your accountant or bookkeeper that may help you in your business and also from the software provider you're going to be using to keep your records digital. Make sure you've got both of those in place because we all need a little bit of support now and again.
- Use MTD as a catalyst for change and to support your business growth.
As I mentioned before, if used in the right way, you can digitize your business to become more efficient, more effective and more profitable. That's good for you and your business.
Think about how you can use the tips above to grow and unlock the benefits to your business.