Making Tax Digital is a new system for doing tax returns being introduced by the UK government in April 2018. The government say that Making Tax Digital will be easier and more efficient for small businesses and that it will raise more tax revenue. The main features of Making Tax Digital are:
- All businesses will have to start using specialist bookkeeping and accountancy software
- Keeping business records on paper will no longer be acceptable
- All businesses will have to move from doing 1 tax return a year to doing 4 ‘tax updates’
- At the end of the year businesses will have to do a ‘tax reconciliation’
- All tax returns to HMRC will have to be done electronically
How will the new system be different?
At the moment most small businesses keep records of their incomings and outgoings and then do a single tax return at the end of the year. It is at this point that they work out how much money they have made or lost and how much tax they will have to pay as a result. Most small businesses will have an accountant help them with their annual tax return to make sure their calculations are accurate and that they are paying the correct amount of tax. The accountant will usually help them out with more complex areas of tax law such as capital gains, company vehicles and pension arrangements to make sure it is all accurately recorded.
The government wants to scrap this system. Instead small businesses will have to start using specialist software to record their incomings and outgoings in real time. This software will then connect to the HMRC four times a year to update the government about how much money the business has made, or lost. The small business owner will be asked to confirm to HMRC that their bookkeeping is accurate and HMRC will record the figures. At the end of the year they will then pay tax based on the four updates they have done and their end of year tax reconciliation. The government suggest that small business should do this without the help of an accountant to check if their figures are accurate and that they have used the tax allowances their business is entitled to.
What software will businesses use?
The core idea of Making Tax Digital is that free software will be available which will allow businesses to efficiently record their figures and upload them to HMRC. At the moment this software does not exist. Using the type of software the government recommends will cost each small business between £300 and £600 per year depending on the brand and features they go for.
Currently there are around 400,000 businesses who subscribe to software that will work with Making Tax Digital. By 2020 the government wants this to be 4 million businesses and individuals. This will obviously be great for the software companies but there are doubts about whether they will be able to scale up their support and infrastructure quickly enough.
Originally the government said that businesses would not be able to use spreadsheets as part of Making Tax Digital. As the free software they said would be available has not appeared they have now backtracked and are investigating whether spreadsheets will be allowed after all. As yet there is no information of what format these spreadsheets will need to be in. There is also little detail on how HMRC are going to process four spreadsheets a year from 4 million businesses and individuals (16 million spreadsheets per year).
Who does Making Tax Digital Effect?
When it is fully rolled our Making Tax Digital is likely to impact 1 in 4 tax payers. Small businesses will be the first group effected by Making Tax Digital in April 2018. By 2020 all self-employed people, freelancers and contractors will have been switched to Making Tax Digital. People who rent out properties, and anyone who has a secondary income over £10,000, will also have to switch to digital tax returns over the same time period.
In most cases where the government introduce new business rules and rates, such as the recent introduction of mandatory workplace pensions, they start with the biggest businesses and work down to the smallest, giving them longer to adapt and adjust. With Making Tax Digital the government is doing the opposite, and starting with the smallest businesses first. The staging dates for Making tax Digital are:
- April 2018 if you are a small business who pay class 4 National Insurance Contributions and Income tax – This is most Sole Traders.
April 2019 all business who are registered for, and pay, VAT. - April 2020 any businesses who pay Corporation Tax.
Why is Making Tax Digital being introduced?
The government argue that making people do regular updates to HMRC about their tax and finances will make life easier for small businesses. The government argues that it is hard for small businesses to work out how much tax they will have to pay and that this causes worry and stress to business owners. They say that by making small businesses do more regular updates to HMRC about tax there will be less stress and less mistakes in tax returns.
However, the government is not introducing Making Tax Digital just to reduce stress for small businesses. They say that errors by businesses and self employed people cost the tax payer £8 billion a year. The governmetn thinks that by making small businesses and the self employed do more regular updates they will be less likely to make these mistakes. They say that Making Tax Digital will cut around 10% of these errors. Their current prediction is that Making Tax Digital will have a net benefit of £945 million to the government by 2021 to 2022.
#saynotoMTD – Find out how you can join our campaign to Say No to Making Tax Digital
UPDATE – March 2017
In the March 2017 budget the Chancellor of the Exchequer, Philip Hammond, postponed the introduction of Making Tax Digital for businesses with a turnover of less than £83,000 citing problems with the original timetable. However, we understand that there is widespread concern in Parliament over the costs of implementing the proposals.