Making Tax Digital: The Awful Truth
For sole traders and partnerships ...
With the Making Tax Digital initiative, HMRC is drawing a line in the sand for every business in the UK to use digital accounting. Unincorporated businesses are first in the firing (or filing) line ...
HMRC's Making Tax Digital initiative will affect sole traders and partnerships soon!
copyright: ayo88 / 123rf stock photo (licensee)
HM Revenue & Customs issued 6 different press releases in August 2016 and their intention is to have all unincorporated businesses (i.e. sole traders and partnerships) who have sales over the VAT registration threshold of £85,000 submitting their information quarterly online from April 2018.
"That's in less than 10 months!"
This is not long when you need to implement a new system, learn it and make sure you are doing it properly. And it's not a long time for the software companies to make the tweaks and changes so that your software will be able to produce and send the necessary information to the taxman. It's not long, either, for the taxman to tweak their own computer systems, but quarterly online filing is on its way.
Limited companies don't escape, but they do get longer to prepare, with a proposed deadline of 2020 before they come into the Making Tax Digital quarterly reporting regime.
Landlords don't get away scot-free either. If you are a landlord and earn £10,000 or more in gross rents then you have to start this from April 2019.
The April 2019 deadline also applies for smaller sole-traders and partnerships, so if you didn't have to start this in April 2018, then you definitely do for April 2019.
"This all might sound boring, but it is very important!"
So, what does it mean for you? Well, if you run a business and your annual sales are £10,000 or more, then you will be caught by the rules!
What do the rules mean?
You will have to use 'digital computer software' for your business's record-keeping - and no, Excel is not good enough! It has to be a proper accounting software!
You (or your accountants) will have to prepare and submit a quarterly tax return sent online directly to HMRC's computers.
Every business and taxpayer will still have to check and make sure the information is correct, and add in any details not already picked up in the quarterly reports. These changes are put in on an annual basis via a fifth return to be submitted after the four quarterly ones have been made.
If you are VAT registered, then you will need to make quarterly payments of tax as well as VAT. The amount of tax will be based on your quarterly tax return. If your business is not VAT registered, then there is no obligation for quarterly payments (and presumably you continue to make either six-monthly or annual payment as at present).
This is a big change! Effectively every business in the UK will be preparing quarterly tax returns, with an end of year update - whereas at the moment you do this once a year. So 5 sets of deadlines with penalties if you miss them and 5 sets of accountants fees too!
What have you got to do?
The first point is start preparing now, don't wait! Start thinking about having proper accounting software and choose carefully. For example, don't get one that is free. Unless it already has the digital HMRC reporting facility, as otherwise they probably won't have the money to develop the software further, and you will just have to change to a better software in a few months' time.
There are a number of good accounting packages out there, but consider choosing one that has automatic software upgrades built in to it. I am sure that the software companies will use this as a chance to charge for updating desktop software, so consider going for cloud software that is continuously updated as part of the monthly subscription price.
If you are VAT registered and will be paying tax quarterly, then in the year of change you will have two years' worth of tax bills that you pay in one year! Make a plan or start saving now, so you have enough money to deal with this by April 2018.
Of course, you might not like the way that the tax man is proposing to roll out making tax digital. In which case, complain to trade bodies like the FSB or Chamber of Commerce and to your MP.
However, even if the taxman's plans are modified or delayed, the underlying strategy of Making Tax Digital is still going to happen eventually. This means it will be to your benefit to make sure you use a computerised accounting system sooner rather than later.
"Would you like to know more?"
If you would like help with Making Tax Digital, or getting better software than you currently have, then get in touch with me on 0333 335 0422. Or click here to send over an email and I'll get back to you.
Until next time ...
Xero, QuickBooks Online and others are all available, and we can help you decide which one is right for you.
I've been an accountant in and for business since 1987 and have a wide experience of consultancy, audit, accounts, taxation and wealth planning work from individuals and small businesses to multinational corporations and charities.
My eclectic interests in growing and developing business span a number of areas … and can be summarised as strategic business advice and tax saving advice.
I have worked with the Chamber of Commerce to deliver courses for people about starting up in business and have lectured about tax for a major accountancy practice and for Milton Keynes College.
I relax by reading fiction and by getting away from the office in a campervan.