The Good News
One of the main advantages of making tax digital for businesses is that it will lessen the chaos surrounding annual tax returns. Here’s a brief summary of making tax digital benefits:-
You’ll submit tax data every three months, which means you can forget about cramming twelve months of work at the end of your financial year.
Far less paperwork
Computer software will make an automatic record of money coming into and going out of your business. You (or your tax advisor) will just check the data and update it to HMRC each quarter.
Because tax will be calculated quarterly, there’s far less chance of a big bill building up. You’ll find out what your tax liability is every few months so nothing gets out of hand.
More chances of lowering your bill through tax planning
Businesses that keep regular tabs on the tax they owe can make strategic decisions to lower their bill. You might make more retirement contributions or reinvest in the business, for example.
Why I don’t have to do paperwork?
Electronic data about your business will go directly to HMRC from banks, building societies, and other government departments. You won’t need to manually process this information for them. That’s perhaps the biggest benefit of making tax digital for businesses. If you set up a smart tax and accounting system, you’ll have far less work to do.
The Bad News
There’s not much wrong with gaining greater visibility of your tax situation. For some businesses, however, there will be changes to manage. Here’s a summary of the issues you may have with making tax digital:-
Compulsory use of technology
By making tax digital for businesses, the HMRC requires you (or your tax advisor) to submit returns online, through either an HMRC app or online accounting software.
More reporting deadlines
While VAT returns were already submitted quarterly, income tax and corporation tax weren’t. After Making tax digital takes effect, however, the single annual filing for income tax and corporation tax will be supplemented by four quarterly reports.
Loss of privacy
You may not be comfortable that some of your electronic transactions will be visible to HMRC. But you’ll be able to review the data and fix mistakes before it’s submitted.
When does it all happen?
MAKING TAX DIGITAL (MTD)
Making Tax Digital (MTD) is an HMRC initiative designed to make sure the UK tax system is effective, efficient and easier for taxpayers.
Making Tax Digital for business (MTDfb) begins on 1 April 2019 with MTD for VAT. From that date, VAT-registered businesses above the threshold of £85k will have to keep digital records and submit VAT returns using compatible software. HMRC lists Xero as software that will be compatible with MTD for VAT.
Other components of Making Tax Digital, such as income tax and corporation tax, have been placed on hold until April 2020 at the earliest. Check this resource hub for updates on the latest developments, straight from HMRC.
Tax recording will be more accurate, providing fewer opportunities for errors, miscalculations and fraudulent activity.
The process will be faster and more automated for businesses, accountants and HMRC, helping them save valuable time.
With the right software, Making Tax Digital will make it easier for small businesses to record and file their tax returns online.