Hetty Verney, ‘Not Your Average Accountant’, explains what Making Tax Digital means for your small business.
What is making tax digital?
Making tax digital is a process whereby HMRC are going to link their internal systems to allow all taxpayers to access their own digital tax account at HMRC online.
This new account will have details of all taxes owed and owing back to the tax payer.
This should allow easier transfer of overpayments from one form of tax to another – for example, an overpayment of PAYE could be transferred against a corporation tax liability.
HMRC are saying that this will mean the end of the tax return as we know it.
One of the most sensitive changes proposed is that under making tax digital there will be new quarterly filing / reporting deadlines for businesses and landlords.
This is likely to mean that if you are a business or have property rental income that you will need to use online accounting / book-keeping software that is compliant with making tax digital to enable the quarterly reporting to HMRC to take place.
If you currently use spreadsheets to keep on top of your income and expenses then HMRC has said that although you can carry on using these they are likely to need to be combined with software to be able to report the quarterly figures.
Currently HMRC have proposed a turnover threshold of £10,000 – if you are under that you would be exempt from the making tax digital quarterly reporting.
This is one of the key areas still up for debate as it is felt by many people that this threshold should be higher and perhaps the VAT registration threshold should instead be used (£83,000 for 16/17).
Below is the current proposed timetable:
April 2017 – HMRC will be entering a trial phase to test how making tax digital will work in practice, working with a small number of test cases.
April 2018 – The self-employed and landlords will commence their making tax digital reporting duties.
April 2019 – VAT reporting gets combined with making tax digital into a new single quarterly report.
April 2020 – Limited companies start their making tax digital reporting duties.
There are still many unknowns and there are a significant number of people unhappy with the proposals, so there are likely to be changes ahead.
If you already use online accounting software such as FreeAgent then for the time being we’d advise just hold tight and await further details over the coming months.
If you currently don’t use online accounting software then it might be worth doing some initial research as to what options are available – Hetty’s default recommendation for freelancers, contractors and micro-businesses is Xero, but there are many other options to choose from.
Are you ready?
For up-to-date information always refer to the UK Government website