One month left for SMEs to make their taxes digital or face a hefty fine

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What you need to know about making tax digital: One month left for small businesses to act or face a hefty fine

  • Making Tax Digital (MTD) legislation  requires businesses with a taxable turnover above £85,000 to keep their records digital
  • Deadline for such companies to comply with new tax rules is one month away
  • VAT registered businesses below the tax turnover threshold can join voluntarily
  • This week HMRC issued over  100,000 TV licence-style warnings to those who failed to meet new digital tax requirements in August

Small and medium-sized business have just under a month left to comply with controversial making tax digital rules.  

Making Tax Digital for VAT is legislation that requires all VAT registered businesses with a taxable turnover of more than £85,000 to keep their records digitally and submit their VAT Returns using MTD compatible software.

Earlier this year, the government introduced new tax rules impacting small businesses and the final deadline for such companies to comply is in early October.

The legislation requires all VAT registered businesses with a taxable turnover of over £85,000 to keep their records digitally and submit their VAT returns using MTD compatible software

The legislation requires all VAT registered businesses with a taxable turnover of over £85,000 to keep their records digitally and submit their VAT returns using MTD compatible software

Businesses affected by MTD for VAT will no longer be able to use HMRC Online Services while VAT registered businesses below the threshold can join voluntarily. 

The vast majority of smaller companies will have been affected from the first VAT period starting on or after 1 April this year and if submitting monthly returns, needed to file by 7 June. 

If filing quarterly, the first deadline was 7 August for the quarter 1 April to 30 June, and the second is this week, for the quarter 1 May to 31 July. The final deadline is 7 October for the quarter 1 June to 31 August.

This week, HM Revenue and Customs (HMRC) issued more than 100,000 warning letters to those who missed the August deadline, though no fines will be issued for the new legislation’s first year in operation. 

Alongside remembering various dates, business owners might feel overwhelmed by paperwork and rules they don’t have time to concentrate on, while others may have questions which they have no idea where or how to find the answers for.

So what do you need to do? This is Money asked accounting software provider Xero and three accountants to find out what small business owners must know about Making Tax Digital.

Accountant Sharon Pocock says MTD will mean less paperwork and less mistakes

Accountant Sharon Pocock says MTD will mean less paperwork and less mistakes

What is Making Tax Digital and does it apply to me?

Sharon Pocock, of accountants Kinder Pocock, says: Making Tax Digital is the biggest shake up of tax administration in recent history. 

It is a new initiative from HMRC designed to simplify tax and give businesses better control of their finances. Right now, the new rules are compulsory for businesses with a taxable turnover above the VAT threshold of £85,000. 

These businesses have to use compatible software such as Xero and others from this list, to keep their records digitally and submit VAT returns to HMRC quarterly. 

Why is this happening?

The Government is on a drive to create a ‘truly digital Britain’, as part of it’s Digital Transformation agenda. It might seem like yet another thing businesses have to comply with, but that’s not what it has been designed to do. 

Once businesses are set up, they will be in a far greater position to understand where they sit financially.

How is it going to help me? 

Gone will be the days of hunting for paper receipts to file an end-of-year tax return, which often leads to inaccurate books and tax returns. This will mean less paperwork and fewer mistakes, but more importantly it will give you a real-time view of your cash flow. By submitting tax digitally via cloud accounting technology, businesses will gain real visibility and control over their data and become more integrated with the industries in which they work.

What are the timings for this?

Making Tax Digital launched in April. But you’ve now only got until October 7th to get ready. So by then, if you haven’t already, you need to submit your tax using compliant software through HMRC. If you don’t do this, you will be fined.

Cheryl Sharp says cloud software is the most effective way of submitting tax digitally

Cheryl Sharp says cloud software is the most effective way of submitting tax digitally

What sort of software should I use so that I can submit tax digitally?

Cheryl Sharp from Pink Pig Financials, adds : Cloud software is your most effective solution, and there are plenty of good options out there. You don’t necessarily need to be on the cloud to submit digitally to HMRC. 

However, it will cause you much less hassle down the line if you are. HMRC have said they plan to add additional requirements to the process once the launch of the new scheme is out of the way.

If you use a cloud-based system, you’ll save yourself the trouble of constantly updating your software and you won’t have to deal with bugs.

The list of software companies that are compatible is really long. How do I even begin to work out which one I should go with?

There are many different software options out there to suit a range of budgets and businesses. Some factors should be considered before committing to a software such as functionality, features and how often they are updated. Ask yourself if they provide the support that your business needs.

Cost is a key factor. If you are already using cloud accounting software, you don’t need to pay any extra fees to be compliant. So it could cost as little as £5 per month to be ready for this. 

Plus, you’ll get all of the other benefits of using a smart, helpful platform to do things like get paid on time, manage payroll and produce invoices. You might not get this with an option that is free.

This is the first I’ve heard of Making Tax Digital? Do I have enough time to get set up to succeed?

If you don’t work with an accountant, it shouldn’t take more than 72 hours to receive confirmation from HMRC that you can submit. Once this has happened, you’ll be able to submit from your accountancy software platform (which also takes no time at all to set up).

Linda Gibson explains HMRC have made allowance for companies with weak broadband which might be worth checking

Linda Gibson explains HMRC have made allowance for companies with weak broadband which might be worth checking

Can I still use spreadsheets?

Linda Gibson, Gibson Whitter, says: If you are comfortable and familiar with using a spreadsheet to prepare your records and VAT returns, don’t worry, there is a solution for you. 

You can still use a spreadsheet to keep track of your accounts. You’ll just need bridging software to submit your VAT returns to HMRC via the new digital portal. 

Bridging software provides a link between a desktop spreadsheet and HMRC, allowing data to transfer over.

HMRC have confirmed that spreadsheets meet their VAT record keeping requirements however by not making the leap to a digital package you might be missing the dual opportunity of future proofing your business against future HMRC changes and gaining more control over your business affairs.

My broadband is really slow. What should I do?

Businesses based in areas of the country with weak internet connections might worry about how they are going to cope The good news is that HMRC has made some allowances for those who experience this issue, so it is worth seeing if this can be applied to your business.

If you do not qualify for an exemption, you could use desktop software that will take data input even when not connected to the internet. As an alternative you could hire an accountant to help you with the compliance aspects or even to take over the entire bookkeeping function so that you can concentrate on your business.

Do I need to authorise a tax agent to submit VAT returns on my behalf?

No this isn’t necessary, you can submit your VAT returns yourself.

If you have an accountant and want them to submit VAT returns on your behalf, then you must authorise them to do so. Without the authorisation, they will not be able to access or submit your VAT Returns.

What’s next for Making Tax Digital?

Once this phase of Making Tax Digital is fully implemented, HMRC’s plans involve corporation tax and income tax. 

The next part of the implementation isn’t expected for a couple of years but HMRC are pushing forward with their digital agenda so it’s worth keeping a close watch on HMRC announcements so you have no nasty surprises.

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