You may have seen Making Tax Digital, or MTD, showing up in the news lately, and for good reason — it’s set to bring about major changes to the United Kingdom’s tax system. While some people are concerned, you don’t have to worry. We’re going to go over the basics of MTD, its benefits, and how it’s going to change the system’s status quo.
So, what exactly is Making Tax Digital and why was it introduced?
MTD is a government initiative to reform and modernize the UK tax system by 2020, and to help make tax reporting easier for businesses. Starting in April 2019, businesses with a turnover above the VAT threshold are required to maintain a digital record that updates automatically and stores all pertinent company data in one place. This online system is intended to increase transparency and eliminate the errors associated with paper tax filing.
As a part of this initiative, all businesses will have access to a digital tax account. From here, they will submit tax information to HMRC on a quarterly basis. It is a step towards making HMRC the most technologically advanced tax administration in the world, and also marks the end of annual tax filing.
How will MTD change the way things are done?
Making Tax Digital aims to restructure the entire tax system in the UK, meaning businesses will have to follow a set of standard record maintenance practices and file quarterly reports. Preparations have already begun, with businesses moving online to increase efficiency and accuracy.
Digital recordkeeping: Businesses and individuals who file with HMRC are required to use digital tools instead of paper forms for record keeping. Failure to keep digital records will result in a penalty of up to £3,000. Intially, the use of spreadsheets for digital recordkeeping was not approved. However, according to the latest announcement, spreadsheets can be used as long as they’re integrated with an accounting app to allow digital updates to HMRC.
Quarterly data: The onset of MTD not only means the end of paper accounting, it marks the end of annual returns filing in the UK. Under MTD, you’ll no longer have to file an annual return at the end of the year. Instead, you’ll update HMRC every 3 months. If you’re used to filing annual returns on paper, the new system might require you to spend more time on your bookkeeping.
HMRC has published a timeline for implementation:
April 2018: Pilot testing begins.
April 2019: All businesses with turnover above the VAT threshold of £85,000 will be required to keep digital records.
April 2020: HMRC will increase the scope of MTD to include sole traders and partners with income between £10k and £83k.
What are the benefits of MTD?
One of the main advantages of Making Tax Digital is that it removes the errors and confusion that come along with paper tax filing. But there are more benefits to MTD than meet the eye.
Stress-free filing: MTD requires you to submit tax data every quarter, which means you don’t have to jam 12 months worth of data at the end of every year, thus reducing the risk of making errors.
Tax in real-time: You will have a continuous real-time view of your tax liabilities as they change. This means you won’t have to wait until the end of the year to find out how much you owe, helping you set aside enough money to pay your taxes.
Paperless taxes: Because businesses are mandated to file their returns online, you’ll need to use software to maintain your accounts and regularly update HMRC. The benefit of an accounting app is that businesses can detect mistakes as they happen, instead of having to go through every single receipt at the end of the year.
Tax information from any device: With a digital tax process, all of your information is available in one system, making it easy to view and access your tax information anywhere, anytime you need it. You can log in to your account through a smartphone, laptop, or tablet to view and edit the data.
What are some of the challenges with the new system?
While MTD comes with a host of benefits, there are some issues to keep in mind.
Privacy: With some of your online transactions and bank data being visible to HMRC, not everyone is comfortable with the lack of privacy that comes with MTD. But at the same time, working online adds an extra layer of security to your data and offers fraud protection, which can prevent unauthorized access to your bank accounts by setting controls in place. It also provides an electronic audit trail of transactions that have been carried out, making it easy to find out what actions have been performed by whom and when.
Technology: Submitting returns online requires business owners to manage their accounts via software. With a multitude of businesses still using paper accounting, the new policy has caused alarm among the not-so-tech-savvy community of business owners. But accounting software isn’t all difficult to learn. Finding an app that’s intuitive and easy to use can make online tax filing manageable even for major technophobes.
Deadlines: Though filing returns every quarter helps eliminate errors, it also means more deadlines to meet and more submissions to make. But this also means you are aware of how much tax you owe, avoiding any unpleasant surprises along the way.
The future of accounting is constantly evolving with new technologies, and MTD is speeding up the process. Though it brings about a drastic change in the way the tax system works, the benefits of MTD outweigh the minor inconveniences that may occur along the way.