By Scott Brown, Managing Director atSable International UK 

Scott Brown

The Making Tax Digital (MTD) initiative plans to digitise the UK’s tax system and put an end to the paper tax return by 2020. MTD aims to lessen the current administrative burden on tax payers by making the entire tax process simpler, better and faster.

HMRC envisions a digitised tax system that is far more transparent and easily accessible than that which currently exists. Small businesses, typically strapped for time, would thus benefit hugely from a reduction in labour intensive administration.

MTD was announced in the 2015 Budget Speech but the government has recently announced a year’s delay in implementation. The new digital tax rules for small businesses and the self-employed will only come into force in April 2019 – and only for those companies with an annual turnover below the £83,000 VAT registration threshold.

All too often, businesses are not prepared for a change in policy and legislation. This puts their operations under enormous pressure to achieve compliance at the last minute. With one year to go, small business owners can start preparing for MTD now and avoid getting caught on the back foot.

Here’s an overview of how MTD is going to work, and what it means for small businesses.

Easier payments, less errors

With MTD, small business owners won’t have to give information to HMRC that they’ve already submitted in the past – or information that is available from other sources like banks or government departments. All the business needs to send through is a quarterly summary of income and expenditure, followed by a voluntary and regular tax payment each quarter. At the end of the year, the quarterly payments will be reviewed and any errors corrected.

The digital platform allows small businesses to see a complete financial picture of their tax account and balance any under- and overpaid amounts. It’s fully transparent and easily accessible which means that all information affecting a business’ tax liability can be collected and processed in as close to real time as possible.

Business requirements 

Paperwork may be a thing of the past, but MTD will require that all small businesses keep a digital record of their accounting records. This will enable them to estimate their tax bill and put the necessary funds aside to meet their quarterly tax payments.

When the system is implemented, sole traders and partnerships whose partners are all individuals will be able to use the cash basis of accounting, thereby allowing them to work out profit based on cashflow, rather than income and expenditure. 

Small businesses that make an annual turnover of less than £10,000 will be excluded from MTD. Additionally, any businesses trading below the VAT registration threshold will have the mandatory requirement for maintaining digital records and submitting quarterly updates, deferred from April 2018 to April 2019. 

Not all are convinced

Industry bodies believe that the MTD is overly optimistic. They’ve asked HMRC to publish more details about its impact assessment and the cost to businesses of digitising the tax system. With Brexit looming large, many believe that the introduction of MTD could cause unnecessary headaches for small business owners.

Even with the delay, there are concerns that the current timelines are too tight but HMRC has confirmed that it will not fine businesses for non-compliance in the first year of implementation. Nonetheless, numerous bodies, including the Chartered Institute of Taxation (CIOT), Low Incomes Tax Reform Group (LITRG) and the Association of Accounting Technicians (ATT), are still concerned that the pace of change is too rapid and want HMRC to further delay the start date for compulsory digital reporting.

A digital tax platform will be a challenge for many small businesses that keep their accounting records in hard copy or on spreadsheets. The fact that MTD has been delayed for a year is a boon – these businesses can now familiarise themselves with all the requirements, invest in the correct software and seek good advice. Enlisting the help of a chartered accountant or tax specialist is a very good idea to help ease the transition.

MTD is set to completely change how small businesses manage their tax. For many small businesses, figuring out how to successfully adopt and adapt to the new system could be a challenge they just don’t have time for.  It’s crucial that they use the extra time they have to get the support they need and prepare their processes as soon as possible. This way they’ll be sure toenjoy all the benefits and none of the frustrations.