HMRC is underway with its strategy to digitize the taxation process and in 2016 there will be millions of people with digital tax accounts.
If you’re not ready yet, you will need to be soon as the planned roll out date is April 2018, with full transformation being achieved by 2020.
HMRC plans to transform the tax system, so that it is more effective, more efficient and easier for taxpayers.
Who does Making Tax Digital Apply to?
At this stage MTD only applies to sole traders and partnerships. HMRC are developing the technology details and your accountant or bookkeeper will get regular updates from HMRC. Limited companies and Directors are expected to be covered in a consultation document later in 2016.
HMRC are proposing that MTD only applies after you reach a total turnover or income of £10,000 per annum. So far, the thinking is that businesses under this threshold would have an extra year to comply with the rules.
What does Making Tax Digital mean for me?
First, the HMRC myth buster – telling you all the things that are not true about the tax system transformation.
HMRC have produced their own helpful myth buster. The main one being that you will not be required to file 4 tax returns a year. Instead you will be required to send data about income and expenditure on a quarterly basis. Expenditure is expected to be broken down into certain categories.
How do I send the data to HMRC?
You’ll send the data from your online (cloud) accounting software. If you are using a manual, paper based system you will have to move to cloud accounting software. This is likely to be Xero or QuickBooks Online, or possibly FreeAgent for contractors. HMRC has confirmed they will not be providing their own free software and digital software that having software that links to your HMRC tax account will be mandatory. No more boxes of papers that are more than a year old.
You can see that Receipt Bank bookkeeping software will be a solution for many, and the accounting software will be compulsory for all (with a few tiny exceptions, not covered here).
Each business will have (probably 9 months) after the year end to submit final figures – an End of Year declaration.
What else do I need to hear about MTD?
You will have the option to report more frequently than quarterly, which will be helpful for seasonal businesses.
HMRC is not currently planning to change tax payment dates.
The cash accounting basis limit may be extended. If that means nothing to you, ask your accountant who can explain this to you.
The details are still in consultation stage, and the end date for comments is 7 November 2016. We encourage anyone interested to read and feed in their comments.
3 Things you can do to get ready for Making Tax Digital
- It makes sense to move to accounting software. Cloud-based software gives you the opportunity to work from anywhere you can get an internet connection.
- Consider some of the expenses capturing apps – snap your bills and receipts and send direct, or export and upload to your accounts.
- Find an accountant to help you. The right accountant will become a trusted colleague. Since tax is going digital, make sure you choose a tech savvy, experienced accountant.
Want to know more?
Contact a cloud accountant or bookkeeper to get advice on how to get ready for Making Tax Digital.