Let's Get Digital...Making Tax Digital
By Balance team, May 8 2017 07:34AM
From April 2018, many businesses and self-employed people (including landlords) will be required to start using digital software for tax records, submitting these to HMRC on a quarterly basis. This is part of a government measure to make tax administration simpler for tax payers, as well as more effective and efficient. By speeding up the collection of tax information, businesses will no longer have to wait until the end of the financial year to see how much tax they owe. Theoretically, this should help to improve cash flow management instead of facing a huge tax bill at year end. What’s more, the aim is to reduce the amount of errors and the £8bn of uncollected tax, which is a hefty burden on the UK economy.
The level of which this new tax system was due to be set has been subject to numerous consultations. Originally, the government planned to roll this out to all self-employed persons and businesses under the VAT threshold – however, this has been lobbied by various parties across the financial sector and beyond.
Who does this apply to?
If your business profits are liable to income tax (currently over £11,500), you pay class 4 National Insurance contributions (NICs) and your turnover is above the VAT threshold (currently £83,000), you will be expected to update HMRC quarterly using digital tax software, which links directly to HMRC via your individual Personal Tax Account. As well as being the portal for submitting your self-assessment tax return, your Personal Tax Account shows your Income Tax estimate, your tax code and any refunds, credits or allowances. HMRC are looking to improve the Personal Tax Account (possibly developing an app) as we move closer to next April, when Making Tax Digital comes into force.
Making Tax Digital – Timeline
• April 2018 for income tax and National Insurance contribution (NICs) purposes if your turnover is over the VAT threshold
• April 2019 for income tax and NICs purposes if your turnover is below the VAT threshold
• April 2019 for VAT purposes for everyone who is VAT registered
• April 2020 for Corporation Tax (CT) purposes for everyone who pays CT
How does digital tax software work?
Say goodbye to those spreadsheets! Although the principle of digital tax software is very similar to Excel, the idea is to keep all of your accounting in one single place on a live, real-time system. The software connects to your bank account and to HMRC. As your customers pay you and you pay your suppliers from your account, there is no need for a separate record of your transactions because the software synchronises with your bank account. Many digital tax systems also include mobile apps so you can scan your receipts in using your phone, which are then uploaded onto an online, usually cloud-based platform. Most digital tax systems have invoicing and customer receipt tools, so this software can add real value to your accounting processes. From a resource perspective, the benefits include greatly reduced manual data entry, which means less time is needed on your bookkeeping. Plus, these systems are fully compliant, which reduces the risk of errors from manual data entry.
If you are going to be affected by Making Tax Digital, speak to your accountant. If it is likely to affect your personal planning please get in touch and speak to one of our financial planners.
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