Making Tax Digital – the countdown has begun

The roll-out of Making Tax Digital is, without doubt, the biggest change to the way tax liabilities are reported and paid for since the introduction of Self Assessment in the 1990s. This brand new system, or rather its first incarnation, will be with us on April 2019.

Here at Accounting Gem, we’ve been preparing for its introduction over the course of a number of months now so that, when it does launch, we’re ready for it.

But what is Making Tax Digital and how will it change the way that accountants and taxpayers interact with HMRC in the years to come?

What is Making Tax Digital?

Making Tax Digital will eventually become the primary method by which companies and the self-employed report their trading income and expenditure to HMRC. To make this possible, every person and business will have, at some point, their own Making Tax Digital account.

The financial information retained on that Making Tax Digital account will be continuously updated using compatible, HRMC-approved software. Account holders will be able to log on at any time to see how much tax they owe as it accrues and be notified as to when payment becomes due.

HMRC believe that the “tax gap” – the difference between the amount of tax collected and the amount of tax anticipated for collection – is partly caused by inefficient and erroneous completion of tax returns. They believe that Making Tax Digital will reduce the chances of mistakes and omissions (whether accidental or deliberate) meaning that they will raise increased tax revenue from the same user base.

That’s the theory but Making Tax Digital has had a difficult birth. After years of changes and the occasional volte face, the system is going live in April 2019 and the first tax it will cover the reporting and collection of is VAT.

Any VAT-registered business with a turnover in excess of £85,000 will have to use the system. The Government Gateway for VAT will no longer work and paper files will not be acceptable. Most cloud bookkeeping systems will provide users with the ability to correctly use Making Tax Digital but others using bespoke software will need to invest in bridging software to comply with the new rules.

Under Making Tax Digital, you will have to keep a lot more information on the VAT you both pay and charge others including the date on an invoice, the invoice value, the rate of VAT applied, and much more. If you’re on the flat rate VAT scheme, you won’t need to keep a digital record of your purchases unless you’re actually claiming the VAT back on that purchase.

Are businesses actually ready?

There has been very recent political concerns regarding the introduction of Making Tax Digital.

As recently as 26^th November, a parliamentary select committee urged HMRC to push back the launch date by one year. As reported in Civil Service World, politicians believe that HMRC has “inadequately considered the needs and concerns of smaller businesses in managing the rollout of the programme…The committee recommends that the next stage of Making Tax Digital is not implemented until 2022 at the earliest, to allow time to learn and act on lessons from Making Tax Digital for VAT.”

Indeed, the committee referred HMRC back to their March 2018 report in which they stated that HMRC was “alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019”.

Not escaping the notice of parliamentarians was the closeness of the proposed date of Brexit and the introduction of Making Tax Digital.

As reported in The Register, committee chairman Lord Forsyth believed that preparations by many business for Brexit was going to mean that fewer businesses would be ready for the Making Tax Digital launch.

The committee also expressed concern about the cost of compliance with one practitioner estimating bills of between £100 and £500 for cloud users, £800-£1,600 for desktop users, and £1,300 to £2,600 for paper record users. The committee commented that “the software industry is, unsurprisingly, responding to the commercial opportunity of Making Tax Digital for VAT. We have seen no evidence that any free software products will be offered.”

Moore Stephens, the accounting network, recently published statistics showing that 37% of UK businesses are “unfamiliar” with Making Tax Digital. Nearly two-thirds weren’t prepared for the deadline and nearly half had “no plans in place”.

April 2019 for some, October 2019 for others

Some businesses will not be required to be ready for April 2019, specifically:

• Trusts
• ‘Not for profit” organisations that are not set up as a company
• VAT divisions
• VAT groups
• Public sector entities required to provide additional information in their VAT returns (such as NHS Trusts and government departments)
• Local authorities
• Public corporations
• Traders based overseas
• Those that make payments on account
• Annual accounting scheme users

However, their stay of execution is only an additional six months.

What’s next for Making Tax Digital?

Making Tax Digital, in its short life, has been a movable feast so far so please be aware that the following might change and change quite dramatically.

Making Tax Digital for income tax incurred by landlords and the self-employed who receive income from their properties, partnerships, or trusts is expected in April 2020. Corporation tax may also join the scheme at the same time.

Other than that, despite the grand plans for Making Tax Digital, there isn’t that much visibility just at the moment on anything else.

Preparing for Making Tax Digital with Accounting Gem

At Accounting Gem, we’re the people with the experience and the track record to fix any accounting issue you have. We represent over 500 different limited companies, sole traders, and partnerships here in Ipswich, Suffolk, and Essex.

Making Tax Digital is coming and we’re here to help. Speak with one of our team on 01473 744 700 or email us on contactus@aag-accountants.co.uk.