Making Tax Digital – do your bookkeeping online
The digital revolution is not just something that’s just affected our personal lives – it’s also had a profound effect on the business world, with more and more businesses being run ‘virtually’ in the cloud and basing their financial systems around an online approach to doing business.
And this move to digital finance is something that’s about to have a profound impact on how you record, file and pay your tax.
HM Revenue & Customs (HMRC) is not an institution known for its cutting-edge use of technology, but even the folks at the revenue are now moving the collection of tax online – meaning there’s a highly pressing need for you to move your bookkeeping and accounts to a digital format that can submit online tax returns.
What is Making Tax Digital?
1 The Digital Tax Account
Every taxpayer and business in the UK has been provided with a Digital Tax Account. In the case of individual taxpayers, they have a Personal Tax Account and every business, whether sole trader, partnership or limited company, has a Business Tax Account to handle PAYE, VAT, Corporation Tax and so on.
Generally, the industry considers that this is a good thing, placing better information about a taxpayer at their fingertips.
2 Feeding the Digital Tax Account with data
The Digital Tax Accounts will have data fed to them by various software products. Currently, payroll software, as a result of using RTI, feeds employment data into a Personal Tax Account and the result is that the account can display a payroll history.
In time, HMRC want other sources of information to feed the account to include bank interest, dividends, rental income and self employed income. This would give a taxpayer a broad overview of their income streams in real-time.
3 Quarterly Updates
From April 2018, HMRC want either some or potentially all sole traders and landlords (or those with an employment but also a self employment or property income over £10k a year) to keep records in an as yet unspecified digital format and submit headline information to them, online, on a quarterly basis.
HMRC advise that spreadsheets will no longer be an acceptable format to be keeping records in but somehow think that businesses can keep all of their records on a mobile phone!
Initially there will be a ‘soft landing’ period of 12 months while taxpayers get used to quarterly updating. After this, a points based penalty system will be in place where missed deadlines
4 Prediction of tax liabilities
HMRC would use all of this information to predict a potential tax liability. Of course, some income streams, such as self employment and property, assuming they were absolutely correctly put together, will be wholly unadjusted for tax purposes and therefore be wrong. There was a suggestion that taxpayers would undertake these adjustments themselves but I firmly believe that clients would still rather use accountants to complete the process.
In fact, when you consider the changes to the tax regime, such as dividend tax, interest allowances, new micro entrepreneur allowances, two new rates of CGT, cash accounting rules and so on, the tax regime will be more complicated than ever!
I believe that there is an opportunity for accountants to be able to visibly demonstrate the savings in tax that they will make and therefore their value to their clients.
What does this mean for my tax?
So, how does the transition across from paper tax returns to online, digital filing affect you and your business?
Over the next two or three years, you’re going to have to make sure your financial systems are capable of supplying the digital data and financial information that’s needed in order to operate your digital tax account.
The level of upheaval this causes will be dependent on how you currently run your books and complete your accounts.
Paper-based accounts – if you’re running a purely paper-based accounting system, you’re going to need to replace this wholesale with an online accounting system – a move which could have a steep learning curve if you’re not terribly conversant with technology.
Excel-based accounts – if your bookkeeping is recorded in an Excel spreadsheet at present, you’re also going to need to upgrade to more flexible online accounting package – a system that has the integration and functionality to submit your financial information to HMRC.
Desktop accounting software – if you use a desktop accounting package, you may still require an upgrade to allow you to submit your accounts in real-time to HMRC. Switching to a cloud accounting package will bring considerable benefits and will make the whole tax process far simpler.
Cloud accounting software – the vast majority of online accounting packages will be set up to record and submit your financial information in the right format for HMRC’s digital accounts. It’s the best option and the one that future-proofs your business for many years to come.