HM Revenue & Customs is well on its way down the path of Making Tax Digital, an initiative that will equally affect businesses and individuals but that few seem to be aware of, much less understand. Digital accounts were introduced for businesses in autumn 2015 and for individuals in spring 2016. These accounts were the first phase of a planned total transformation into an online tax system, scheduled for completion in 2020. Businesses won’t be able to opt out of digital filing, and they should be planning for the change now. By adopting accounting software from one of the many quality cloud solution providers, you will avoid a scramble later.
What will MTD look like?
HMRC aims to create a system that will allow all tax entities in the UK to interact with it in real time. The idea is that all businesses and individuals will understand their status at all times – not only knowing just whether they owe money, but also having a bigger picture of their finances as they relate to tax, including liabilities and entitlements. From the Making Tax Digital paper released in December 2015:
“The vision set out here is about much more than simply adding digital tools to the current system: it is about transforming the UK tax system into something that feels completely different. HMRC will collect and process information affecting tax in as close to real time as possible….”
What will businesses have to do?
The annual return will no longer be necessary, instead replaced by quarterly reporting. That’s right: quarterly, or “at least quarterly”, according to HMRC. The filing process will need to be done electronically, and this is where a massive traffic jam is likely to occur, as most UK small and microbusinesses do most of their record keeping on paper.
The Institute of Chartered Accountants in England and Wales have been keenly analysing HMRC’s proposals and currently believes that this requirement will place undue burden on SMEs, but ICAEW have so far been unsuccessful in getting the agency to reverse course or change the schedule. Small businesses, then, need to plow forward.
Why are cloud solution providers necessary?
Electronic filing does not mean uploading your Excel spreadsheets to HMRC or emailing documents. You will use accounting software that talks directly to HMRC systems. The agency will be approving a number of as-yet unnamed free programs for use, but businesses shouldn’t be waiting for the announcement.
Learning the software, understanding the type of record-keeping necessary, and populating the forms with your information will take time. You might even need the services of a bookkeeper or chartered accountant. Most SMEs will need to change their habits, and this will take time as well.
Do your research now to learn which cloud solution providers will best suit your needs. According to the ICAEW, non-VAT-registered small businesses will be required to change over first, “with an accounting period starting after April 2018”. For such a monumental change, that date will come faster than you think.