What the Making Tax Digital (MTD) Initiative Means for You as a Small Business Owner

If you haven’t heard of the MTD initiative before, don’t worry – we’ve got you covered. It’s pretty straightforward, and the main goal is to make it easier for businesses to file the right amount of tax and to stay on top of it all.

This is good news for small business owners, but it’s also good news for Her Majesty’s Revenue and Customs (HMRC), because it will help to make sure that they’re not missing out on tax revenue.

The British taxation system hasn’t historically been the most cutting-edge, and accountants aren’t necessarily known as early adopters of new technologies. That’s why the Making Tax Digital (MTD) initiative was launched, in a bid to bring the tax system into the 21^st century.  

Most people try to get their tax right with the best of intentions, but that doesn’t mean that they never make mistakes. In fact, research from HMRC shows that avoidable tax mistakes cost them over £9 billion every year. Perhaps it’s no surprise that they’re so keen on cutting down on it.

The MTD initiative includes some changes that business owners will need to wrap their heads around if they want to make sure that they’re in full compliance. For example, many businesses with a taxable turnover above a certain rate will be legally required to use the Making Tax Digital service to keep digital records and to submit their tax returns.

The good news

Fortunately, many businesses and accountancy firms are already well ahead of HMRC and have been keeping fully digitized records for several years. There are plenty of good reasons for doing this, such as the fact that it allows you to view real-time financial records and smart projections to better manage your ongoing cash flow.

With that said, just because you’re keeping digital records, it doesn’t mean that your system will be compatible with the government’s tax gateway. You may need to work with a professional to identify whether the software that you’re using is fit for purpose, so feel free to reach out to us if you have any questions.

Some companies are already taking part in a live pilot test to help HMRC to develop their digital offering for income tax. This means that if you’re self-employed as either a business or a landlord, you can use the beta version of their software instead of being required to fill out a self-assessment tax return.

Not unusually, there’s also no need to panic about immediately being in compliance because the rollout has been delayed to give you a little extra breathing room. Back in July 2017, the government said that the Making Tax Digital initiative wouldn’t be in full force for taxes other than VAT until April 2020. Since then, they’ve also said that they won’t be applying it to any new taxes or businesses in 2020.

How the MTD initiative will affect you

The MTD initiative might not affect you at all, at least immediately. If your company has a turnover of less than £85,000 then it won’t be affected until at least April 2020, although that’s no excuse not to make sure that you’re in compliance ahead of time. If you’re earning more than that, you’ve been required to keep digital records for your VAT since April 2019.

The good news is that this is mostly just a change in the way in which you provide your records, and it won’t require you to provide information more frequently than you already are. There are also plenty of resources out there, many from HMRC itself, which it says is trying to support businesses in making the transition.

Some people have even suggested that the delays in the Making Tax Digital rollout are an indicator that the government has no plans to make it mandatory at all. We’d beg to differ, but either way, it’s a good idea to make sure that you’re keeping accurate digital records within the government-approved system. You can do this by proactively volunteering to test it out, although you’re under no obligation to do so.

Either way, it’s a good idea for you to start getting ready by switching to a supported software system and by ensuring that you’re recording the vital information that HMRC asks you for. Most of these software applications will automatically prompt you to store all of the data that HMRC requires, but you can also ensure you’re in compliance by double-checking that you’re logging the information they’re asking for. This includes:

• Times/dates of goods/services supplied, along with the net value excluding VAT and the rate of VAT charged
• Accurate records about your company including its legal trading name and its primary business address
• Your company’s VAT registration number and the details of any VAT schemes that your company takes part in

What you need to know

If you’re a small business owner and you’re trying to wrap your head around the wider implications of the MTD initiative, there are a few general rules of thumb that you can follow. Here’s what you need to know:

• You need to go 100% digital: This only applies to your finances, so you can still stay old school and keep your notes in a physical notebook, if that’s what works for you. However, all invoices, payments and receipts will need to be digitized. An Excel spreadsheet isn’t going to cut it, but the good news is that HMRC provides tools that you can use if you’re struggling.

• The traditional tax return is dead: When you’re using MTD tools, you update your data at least every quarter instead of focusing on one big tax return at the end of the year. The good news is that it saves time in the long run, while simultaneously making sure that your records are up-to-date and accurate at all times.

• You won’t have to pay more: The only reason that your tax bill could increase because of the Making Tax Digital initiative is if you were previously underreporting the amount of tax that you owed or if you’re found to have made errors. The good news is that you can often find yourself paying less tax too, and the most likely scenario is that you’ll end up paying the same amount as usual.

• You can’t just forget about it: If you try to just forget about the tax you owe like the proverbial ostrich burying its head in the sand, you’ll quickly find yourself getting into trouble. Because you’ll be required to file reports quarterly instead of annually, and because all of your data will be digitized, there’ll be no room for errors or for missing data.

• You’ll have a better understanding of your finances: One of the side-effects of keeping all of your data in a digital platform is the fact that you can see real-time estimates and projections that will show you how much cash you have on hand and how much tax you owe at any given point.

• You’ll make better decisions: Building on from the last point, you’ll have more accurate data with which to make your decisions. This means you’ll be able to avoid overcommitting when cash flow might be a problem, and you’re less likely to need to resort to loans and overdrafts to keep your business afloat.

What’s next?

The next big milestone in the history of the MTD initiative will be in April 2020, when it’s due for a wider rollout across smaller businesses. You’re already required to upgrade to a digital platform if your turnover is above £85,000, and if your turnover is below that then you may still need to switch over this April.

The good news is that by switching to an MTD-approved system, you can track your finances more efficiently while simultaneously making sure that you’re in full compliance with the new legislation. It’s better to do that now and to know that you’re ready than for April to roll around and for you to panic.

In fact, if you leave it too late then don’t be surprised if you end up having to pay a premium or sitting on a waiting list as overstretched accountants try to deal with the sudden influx of new customers.

And of course, if you still need help wrapping your head around the MTD initiative, we’d be more than happy to help, so feel free to head to our blog to find out more. We look forward to hearing from you.