Making Tax Digital: The Basics
Just like everything else in the world, tax returns are now joining the digital revolution, so it’s important to know how this impacts you as a business.
The Making Tax Digital initiative has been set up by the government to meet our advanced technological needs. The goal of the initiative is to bring an end to the tax return by 2020 with regular reporting through software designed by the HMRC. The initiative was first announced in the March 2015 Budget.
This requires regular (quarterly) updates instead of an annual tax return. The government argues that this will provide an easier option for businesses, and will be more efficient than current practices.
Who Is Affected?
Businesses, landlords and the self-employed will all be affected by the initiative. There are some exceptions – for instance, you are exempt from MTD if you are a sole trader with a turnover less than £10,000. And businesses that are only slightly above this threshold may have an additional year to prepare themselves before changing over.
Other businesses exempt from MTD include those that cannot for genuine reasons of age, disability, location or religion.
How Does It Work?
Using free accounting software, businesses will send quarterly tax summaries to the HMRC revealing total income and total expenditures. Expenditure information is broken down into sections such as travel and marketing costs.
Businesses will also need to send a final end of year summary within 9 months from the end of tax year. As a result, businesses won’t be required to maintain paper copies and VAT would be covered in a single report with your income details.
What Concerns Are There?
There are a lot of concerns that the government is rushing out the MTD with a one-size-fits-all attitude. According to the Federation of Small Businesses, a lot of SMEs may struggle because they haven’t had the time to adapt to the new compliances set out by the initiative.
As the MTD hasn’t been tried and tested, it could have a massive effect on businesses that aren’t used to managing their records digitally. There is also the consideration for many businesses that lack digital knowledge and understanding, that may struggle to change their tax reporting so quickly without the relevant training.
The reality is that none of this initiative has been perfected yet and there are a number of questions that need addressing before it can be rolled out.
If you’d like more information about the Making Tax Digital scheme, speak to a member of our team today.