With Making Tax Digital aiming to restructure the entire tax system, businesses all around the UK are getting ready for the changes that Phase two of MTD brings. If you are a business owner in the United Kingdom, you must be aware of Making Tax Digital and how it will affect your business.
This article will talk about what MTD is, what new requirements it will create, and how online accounting will help you stay compliant with the new rules and regulations.
What is Making Tax Digital in Accounting and Bookkeeping?
Making Tax Digital is a government initiative to digitize the UK’s tax system and simplify the way tax is collected. The main idea behind this reform is to give HMRC more efficient access to businesses’ financial records and to establish HMRC as the most technologically advanced tax administration globally. This initiative aims to eliminate annual tax returns, replacing them with quarterly digital updates to HMRC.
What are the requirements in Phase II of MTD?
MTD Phase I (Starting from April 1, 2019) was introduced to all VAT registered businesses with the turnover threshold of £85,000. Digital filing and quarterly reporting of the tax returns were imposed.
Come Phase II (Starting from April 1, 2022), all VAT registered businesses are required to join the MTD initiative regardless of their turnover and the businesses are bracing themselves to start their digital journey in accounting.
– Quarterly reporting
Along with digitizing the tax system, MTD also seeks to end annual tax returns. With MTD, businesses will be required to update their financial data (income and expenditure) in the MTD interface every quarter. HMRC will then calculate their expected tax, which will be displayed in their digital tax account. Quarterly submissions will be due a month after the end of each quarter.
– Going digital
One of the main objectives of MTD is to ensure that businesses keep their records digitally. This move to digital record-keeping is intended to eliminate the errors associated with pen-and-paper accounting. Businesses can still use spreadsheets, as long as they are integrated with an accounting program so that their updates to HRMC can happen without errors.
– Digital liks
A digital link is required to move your VAT data between accounting or invoicing systems before digital filing. Digital links include spreadsheet formula links, emailing data, memory sticks, and uploads/downloads of data in CSV or XML formats. Manual cut and paste in spreadsheets will be rejected by HMRC. This will affect businesses that still rely on manual spreadsheet accounting.
How does accounting software help with MTD?
MTD requires all businesses to use an accounting tool. The transition to MTD is expected to be smoother and easier for businesses who are already maintaining digital records of their business data. While MTD doesn’t require businesses’ accounting software to be cloud-based, it definitely makes things easier. Online accounting simplifies the transition to MTD by reducing manual data entry, keeping your records where they’re always available, and providing a platform for collaboration..
– Minimal manual intervention
While a lot of business owners are skeptical about moving to the cloud, an online accounting system will provide you with more powerful tools and features to manage your records while meeting the MTD requirements. As quarterly reporting becomes mandatory, you will need to spend more time on bookkeeping, and having a system that works in real time can save you hours of manual work. An online accounting system that integrates with the HMRC interface can simplify your quarterly reporting and cut down on your manual data entry.
Accounting software makes it easy to spot errors when they happen and rectify them immediately. When updates happen in real time, businesses can know how much tax they owe and budget accordingly, instead of having to wait until the end of the year to find out.
– Access wherever you go
With quarterly reporting comes more frequent deadlines, and you need a system you can access on the go. Suppose you are on a business trip and you need to update your financial records. With online accounting software, no matter where you are, you can sign in on your smartphone or laptop to access your business finances, update your records, and send your data to HMRC.
– Work closely with your accountant
If your accountant manages your tax reporting, online accounting software offers a more effective platform for sharing your data than desktop accounting. Just add your accountant as an additional user with role-based access. They can then view and update your records from anywhere, so you’re always ready to send your reports to HMRC every quarter.
Your accountant would be the first to tell you to keep cost in mind when you’re considering the switch to digital accounting. The good news is that a good online accounting software doesn’t cost much, and is often even more affordable than desktop accounting. Take a little time to look around the market and you’ll have no trouble finding an online accounting solution that meets your needs.
The benefits of digitization are vast. With or without MTD, businesses will eventually move to accounting software and cloud accounting. But with MTD speeding up the process, it is important for businesses to plan and prepare for the switch to digital accounting now. From maintaining daily records to sending your tax reports to HMRC, online accounting just makes for the smoothest ride.
A word from Zoho Books
While MTD requires businesses to adapt to new methods and technologies, a robust accounting tool like Zoho Books, with its easy-to-use interface, can make this transition effortless. Maintain your financial records digitally, file VAT returns directly to HMRC, reconcile your bank statements, oversee projects, eliminate compliance worries, and more. With Zoho Books at hand, your growing business can get all the accounting capabilities it needs.
To make the transition into MTD smoother for small businesses, we are offering 50% off on top of your annual discount for the first 12 months of any Zoho Books’ paid plans. Sign up and the avail the offer right away.