Tax and Digitisation - What You Need To Know
They have taken their time about it, but Her Majesty’s Revenue and Customs (HMRC) are now insisting that everything goes digital. Going ‘digital’ is hardly new; we access our bank accounts online, we advertise our businesses online and we even order our groceries online, so this is far from bleeding edge. What does HMRC mean when it talks about going digital?
Why is this a happening and what brought it about?
HMRC is aiming to be the leading digital tax authority in the world. AccountingWeb and Quickbooks undertook a survey of 271 accountants a couple of years ago and discovered that 35% of the responses suggested that client’s records are poorly maintained. If true, this is a problem for HMRC as poor record keeping can directly affect the payment of taxes, and HMRC is all about ensuring that tax is paid.
What do HMRC hope to gain by digitisation?
1) More tax monies will be collected
2) There will be better allocation of HMRC resources, less manual input from individuals and an overall reduction in errors
3) More accurate submissions of tax returns
4) Improved understanding - HMRC hopes taxpayers will better understand how much tax is owed – much like online banking.
5) They say it will make contacting HMRC easier with online web chats and secure messaging.
And finally, most other countries are doing it, so why not the UK.
Where is all this leading?
1) Firstly, mandatory digital filing. All submissions to the HMRC will be done online
2) Access to transaction level data.
3) Access to data directly through open banking and government departments
4) An acceptance of using technology in business and obviously an increased compliance complexity
Whatever our views on Making Tax Digital (MTD), this is what is going to happen, and it is only a matter of time before nearly all taxes are dealt with in this way.
What are the concerns about Making Tax Digital?
Some people think that it is not realistic to expect business owners to cope with submitting four self-assessment returns when they currently only need to submit one.
There are fears that the new system will lead to an increase in the number of penalties being imposed by HMRC, in part due to the increased reporting requirements.
We will have to give almost real-time information to the HMRC which means that businesses won’t be able to focus on the business
With VAT returns being increasingly automated, and possibly with insufficient opportunity for review, there is a danger that the number of inaccurate returns could increase, especially during the early days of digitisation.
Business could find themselves paying the wrong amount of tax, leading to either cash-flow problems or the imposition of catch-up charges, neither of which benefit the business.
There are so many accounting packages appearing which claim to help with digitisation – which one is suitable for your business?
None of this sounds great…
Don’t panic – it’s not all bad! Most companies and businesses in the UK have used digital accounting for several years, long before HMRC advanced the idea of Making Tax Digital. Consequently, the move to full digitisation should be relatively easy for them.
The government has already listed recommended software for digital record keeping in order to ensure that business owners in the UK are not persuaded into buying software which isn’t necessary.
It is likely that HMRC will make free software available for those businesses not yet using software to automate all their accounting processes (they have done this before in respect of PAYE). What’s more, this free software should be updated automatically in order to ensure that there are no problems with the implementation of the new system.
The government has also confirmed that businesses will still be allowed to use existing spreadsheet applications for managing and organizing their data. This concession comes with a caveat: the spreadsheet applications used by businesses need to be in line with the requirements of Making Tax Digital.
Undoubtedly there is a cost involved in inputting invoices and processing all the expenses in accounting software; it can take longer than just entering the data into your current spreadsheet. However, this effort is offset many times over by the reduction in time required to complete and submit your tax returns.
As ever, it’s swings and roundabouts. Many accountancy packages are available online which makes maintaining records even easier as you are not tied to a physical location. Keeping on top of records and information is possible even if you travel extensively for your business.
There are benefits!
Improving your digital and online skills
Your accountant doesn’t have to spend as long sorting through your accounts, allowing them to calculate your tax and allowances more accurately
Accounting software can also give you a better idea of any issues in your business finances
You’ll spend much less time spent on paperwork.
Since invoicing is part of the package, you will be providing your clients with a more professional service.
Let’s talk about Making Tax Digital and Accountants
A recent survey by Xero, who market their own accounting package, found that 25% of accountants hadn’t heard of Making Tax Digital (MTD), that’s a worrying figure if true. If MTD has come as a nasty surprise to you, you are not alone!
Making Tax Digital will have a profound impact on how businesses operate, but it will also make a big difference to the way that accountants support their clients. These coming changes have forced us as accountants to reassess what is expected of us, and how best to deliver this. Frankly, the concept of putting all accounting on a digital platform is something that all accountants should be thrilled about!
How to approach digital tax
The critical thing in determining the way to address MTD is to start with the way that you currently work with your accountant (if you have one) and how you want to work in the future.
There are broadly two ways of working:
1) You submit your own quarterly VAT return using the current web form (or paper return).
2) You pass information to your accountant and they do the return for you.
It’s likely that after April VAT deadline you will continue to work in a similar manner. The big difference is that your sales and supplier invoices and expenses must all be recorded digitally. It will be against the law to simply total up the amounts of VAT, sales and costs and key the totals into the HMRC web form. They must be put into a system by either you or your accountant. This is one of the most far-reaching changes.
The system has been designed by HMRC with the role the of accountants in mind. In HMRC’s world, accountants are “agents”; they act on behalf of a business. This means that they can make VAT submissions under the new regime and will be able to do other types of return in the future too.
One of the problems is that this is slightly more complex to set up. Businesses who have installed accounting software (installers) can authorise HMRC to allow agents to send and receive information on their behalf. Once that is done, the agent can sign up the installers’ business to any service, and then use their own software to interact with HMRC on the installer’s behalf. It’s a two- step process where you have an agent, while it is a single step when installers do things entirely for themselves.
At the moment, a mere 8% of VAT registered businesses use accounting software under their own control for their VAT calculations. I suspect that implementing accounting software isn’t a top priority for many businesses.
It’s not all bad!
Being forced to embrace accounting software, and the processes that come along with it, may ultimately bring real benefits to businesses. MTD could be the push for finally adopting such a system.
Introducing new software can give rise to new costs and challenges, but with planning most of these can be mitigated:
The new software might not fit the business – that’s why it’s important to spend time choosing software that works for you and your business
You may need a lot of hand holding while getting to know the software, so it’s vital your supplier is both willing and able to support you.
Implementing a new system can greatly improve the process of collecting and submitting data to your accountant, a time saving compared to gathering a mountain of paperwork and getting it to them to sort out.
Where now?
Every VAT registered business should already be considering their plans for MTD. If you currently do everything yourself, and are unsure how the changes affect you, speak to a company such as my own, Anlo Financial, who would be delighted to discuss the changes and offer advice.
If you already have an accountant, hopefully you are already having this conversation. If not, it’s time to chat with them.
My strongest advice would simply be this – do something and don’t delay.
Contact us for some free advice today.