Tax is turning is digital – you’d better be ready

Attention all SMEs: Tax, like all other things in life, is going digital. Make sure you and your business remains compliant whilst Making Tax Digital is being introduced.

Our team of tax accountants have broken down everything you need to know about Making Tax Digital so you can get up to speed, and just as importantly, ensure you avoid any fines come April next year.

Want to speak more to an accountant about Making Tax Digital? Get in touch here, or try our instant accounting quote tool and one of our team will contact you shortly.

What is Making Tax Digital?

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world, but how does it hope to get there?

The answer is through the introduction of Making Tax Digital, it’s one of the first processes to be implemented in the digital overhaul. However, changing the process in any business is often daunting, time-consuming, and comes with an additional cost.

Due to the criteria of Making Tax Digital, transforming the way VAT is submitted digitally, it will be SMEs (along with VAT registered sole traders) that will be hit the hardest, and especially those that have previously kept manual records as they will need to engage on the technical side in order to be compliant with Making Tax Digital.

Who does Making Tax Digital apply to?

Making Tax Digital applies to those whose taxable turnover is more than £85,000 for the 12-month period ending March 31st, 2019 and every rolling 12-month period thereafter requiring and, with the deadline fast approaching for Making Tax Digital VAT, SMEs must get on board with digitisation.

So, what do SMEs need to consider to be Making Tax Digital ready?

Who should be Making Tax Digital compliant?

If you’re registered for VAT and your taxable turnover is above the VAT registration threshold (currently £85,000), you will be required to keep digital business records and send your VAT returns to HMRC using Making Tax Digital compatible software.

HMRC has opened a pilot scheme which will help organisations prepare for the changes sooner.

How complex is your business?

A decision has been made that more complex businesses will have a six-month deferral to the start date.

VAT registered businesses with turnover below the VAT threshold (i.e. those that have registered voluntarily) can continue to maintain their accounting records and file their VAT returns as they do currently, at least until 2020.

If your taxable turnover falls below the threshold after April 1st, 2019 you will still be required to keep digital records unless you de-register for VAT.

Where to begin?

The first step to take is to register through your existing Government Gateway account for Making Tax Digital. If you do not have an account you will need to register, remembering to allow time for the activation code to be sent through the post.

When you need to file your first return will depend on what your VAT quarters are.

The first return will be the first complete quarter that falls after the April 1st, 2019, i.e. If your VAT quarter is January to March, the first return to be filed using Making Tax Digital will be April to June 2019 return, deadline for filing due June 7th, 2019.

If your quarters are February to April 2019, the return May to July 2019 will need to be filed using Making Tax Digital. To clarify, it is the first complete quarter that falls after the April 1st, 2019.

Yes, that’s the same April 1st that’s less than 6 weeks away, and no, this is not a drill.

Choosing the Making Tax Digital right software

How an organisation approaches the selection of Making Tax Digital compatible software can depend on their existing accounting systems

There are several accounting software providers that are HMRC approved, offering discounts to entice companies and sole traders to sign up, but as a Xero Partner we highly recommend using Xero as your software of choice - beyond Making Tax Digital compliance, Xero can play a vital role in data, valuable insight, and business growth.

In using Xero, our team will support you and your staff through the transition, offering sufficient training and ensuring you're getting the very best from the software.

What are the potential penalties under Making Tax Digital?

Whilst HMRC has introduced a "soft landing" on penalties for the first 12 months, these are only relating to the digital links for transferring of data between software programs or applications.

No surcharge is payable if the VAT liability is paid by the due date, but the current surcharge process will still operate – making it more important than ever to ensure you’ve done your due diligence and you’re Making Tax Digital ready for your next VAT submission in April.