Making Tax Digital, or MTD for short, is a part of the government’s plan to make it easier for individuals and businesses to keep accurate tax accounts and stay on top of their business affairs online. The overall aim is to facilitate the end of year tax returns online for all people and companies who need to do so.
At the moment, individuals and businesses have access to their own personal digital tax account online. These services are being regularly improved and made easier to use. As the tax service aims to become the most streamlined and digitally enhanced in the world, the tax system should become more effective and efficient. This will make it easier for all people to comply with the tax rules and regulations.
A digital approach is the proposed future and widely regarded to be the best option. However, as you might expect, there has been some concern about how quickly these changes are happening. And with a deadline for some services to be digital by 2019, there is still work to be done to assist all people to go digital before then. The 2019 deadline is only for companies who meet the VAT threshold obligations, but more services will be expected to be online by 2020.
What the MTD means for you
There are four main pillars of the MTD system and they are designed to make the tax system better for the end user.
Better information
The idea is that you won’t need to provide the government with information that it already has or can get from other sources. It should be able to source this information from employers, banks, building societies and other departments. You will have access to all the information they hold on you and can make corrections as and when required.
Real time tax
If waiting until the end of the year to calculate tax is not an ideal situation for you, then the new system will let you see what you owe throughout the year. HMRC will collect and process tax information as and when, helping to prevent errors and excessive build up. So no more end of tax year stress.
One account
As it stands, there is no one single place where you can see all your liabilities and entitlements. This will change with the new system, where you will be able to see your entire financial system in one place, just like your online banking platform.
Interactivity
You will now also be able to contact HMRC agents directly and receive advice and support about your tax account. New software such as Xero and QuickBooks Online will let you send and receive information directly.
MTD for individuals
As it currently stands, customers are obliged to provide HMRC with information each year, and mistakes are made that lead to inaccuracies in the tax accounting system. With more than 10 million people filing tax returns each year, there are problems collecting information and money on such a large scale. This can and has led to penalties that can be avoided in the future. More effective use of information will reduce the burden on customers and hopefully bring down costly errors.
As the personal tax accounting system develops, you will be able to tell HMRC things as they change. Over time, you will no longer need to fill out lengthy tax returns each year.
For businesses
If you meet the VAT threshold, then you will be obliged to use the new system by 2019. Small businesses who do not meet these levels will not be required to use the system just yet, although they can do so voluntarily. The 98% of VAT registered businesses already filing electronic returns will not have to provide HMRC with new information. The changeover will hopefully be seamless and provide a single point of digital record keeping going forward. Quarterly updates will be generated automatically and new software will let you communicate directly with HMRC.
Businesses can provide other quarterly updates for non-VAT taxes but this will not be obligatory for some time. This combination of seamless transition and voluntary opt ins will hopefully make the changeover an easy one. There has also been a commitment to not widen the obligatory MTD system until it has been proven to be more efficient and effective for VAT tax collection.
How to prepare for MTD
So, what do you need to do to get ready for the advent of MTD? From now on, bank transactions and other financial information will automatically flow into your digital account, whether or not you declare that income or expense. So, in terms of this information, there is nothing extra you need to do.
Submissions will need to be made quarterly and filed using app software. This is the area where you may need some assistance and where accounting support may be helpful. It may feel like a burden but doing it in this way will reduce stress and the possibility of mistakes in the end of year rush. No more big backlogs to work through, just little and often accounting that helps things to be more efficient and accurate. The new software will increase communication and allow the digitalisation of your tax accounting, with much of the work being done automatically.
During the transition, there will be a time of adjustment and while there have been some calls for a delay, the new system will be more effective. It means that many businesses may need to work a little closer with their accountants, but it should ultimately be of benefit to both parties.
Here at Together Accounting we offer advice and services for smaller UK businesses. We know that you don’t want to worry about tax and that comprehensive changes like this can be a real headache. That’s why we’re here to help you get fully up to speed with the new system and offer a range of packages that mean you know where you stand, both today and tomorrow.
