Making Tax Digital started on 1st April 2019 for many VAT registered businesses in the UK.
This is a new digital process mandated by HMRC that changes the way you submit your VAT returns.
This could be a big deal for your business.
How much of a big deal depends on whether your current accounting/bookkeeping system is ready for Making Tax Digital*.
* (For simplicity, I’ll refer to Making Tax Digital as MTD from here on)
In the article that follows, I’ll aim to answer 5 key questions:
- What is Making Tax Digital?
- Who is affected?
- What you need to do to get ready?
- What the penalties for non-compliance?
- What should I do next?
The UK Government are in the process of digitising the UK Tax system. This means a lot of changes including a mandatory new way to submit VAT returns. This is made possible by a move to an entirely digital system.
HMRC say their aim is to make the tax system easier, more efficient and more transparent. We’ll see!
While there is still a lot of details yet to be disclosed by HMRC, we do know that many businesses are now required to submit their VAT returns using MTD compatible software from April 2019.
If your business is VAT registered and has VATable turnover of £85,000 or more, then you will be most likely be required to start complying with the MTD rules.
I say “most likely” because there are (as always) a few exceptions to this rule. You can read more about the specifics here but do read on as all businesses will have to comply with MTD in the fullness of time.
This is the BIG question. The simple answer is “it depends on what accounting/bookkeeping system you currently use”.
> You have accounts in the cloud:
If you have a cloud based accounting system like Xero, then you should already be ‘ready’. To see a full list of software providers currently ready, please click here.
> You use older software:
If you run an older accounting system using locally installed software on a desktop computer in your office, then the chances are you will need to either upgrade or change your accounting system to be MTD ready.
If this is you, the best thing is to check with your software provider directly. However, be warned that upgrading to the latest version of your current software may not be the cheapest (or easiest) route to take.
> You run a manual cashbook (paper based or Excel):
If you run your accounts on a manual cashbook basis or on your own Excel spreadsheet, then you will also need to upgrade your system to be MTD ready.
Several companies are producing ‘bridging’ software that enables you to submit your VAT returns using Excel. To find out more, take a look at the current list of bridging software providers included on HMRC's current list here.
Alternatively, this may be a good opportunity to consider moving your accounts/bookkeeping to a cloud based system like Xero.
As you may expect, there are penalties if you don’t comply, just as there are already penalties for non compliance in the current VAT regime.
However, this is where it gets complicated - the type and size of penalties for non-compliance vary depending on a number of factors.
Instead of listing that out here, I’d recommend you take a look at this comprehensive article by the ICAEW (the Institute of Chartered Accountants of England and Wales) which gives a good overview.
First, find out if your current bookkeeping system is MTD ready. If you are not sure, you may find this free online MTD readiness tool helpful. Head over to www.critchleys.co.uk/getready to get started.
If your accounts system is ready, great. If it isn’t, you have a decision to make.
- Upgrade your current software. Pros: you stay with a known system. Cons: can be expensive and complicated to upgrade.
- Move to a cloud-based system. Pros: can be cheap, always updated, simple monthly subscription payments, all the benefits of connecting your accounts to other apps that make business better. Cons: learning curve as you get used to a new environment.
- Outsource your accounting/bookkeeping. Pros: someone else does it all for you, freeing up your time and decreasing your stress. Cons: It will costs more than doing it yourself, though of course you need to balance that with the time you free up by getting someone else to do your financial admin for you. (If you want to find out more about outsourcing your bookkeeping, click here).
To help you figure out your best next step, try one of these options:
1. Use our (free) online MTD readiness tool
To help you figure this out, we’ve made a free online guide that you might find useful. Answer a few short questions and we’ll suggest the best next steps for you to consider.
Head over to: www.critchleys.co.uk/getready
2. Let's chat directly...
You can also set up a chat with me directly if you would prefer. Feel free to connect with me on LinkedIn if you would like to explore further, or give me a call on (01865) 261100.
I hope that's helpful. Thanks for reading!
This article has been designed for information purposes only. No action should be taken without seeking specific professional advice.
If you want to dig into the detail of MTD, then have a look at the official guidance laid out in the VAT 700/22 Notice here.
Find out more about James Sherbourne