‘Making Tax Digital’ and the Benefits for Businesses.
Updated: Aug 2, 2019
At a glance
- Businesses and sole traders with an annual turnover above £85,000 are required to register for Making Tax Digital.
- Despite Making Tax Digital coming into effect on the 1st April 2019, only 4% of the 1.2 million VAT-registered UK businesses required to use the Making Tax Digital service have registered so far and, starting April 2020, will be at risk of facing penalties from HMRC for non-compliance with Making Tax Digital in addition to resulting late VAT submissions.
- Research from Volterra Partners and QuickBooks found that due to an increase in productivity and efficiency from digitising the tax process, sole-traders should see, on average, an increase of £1,900 in annual revenue, while small business with 10-49 employees should an average increase of £18,000.
What is Making Tax Digital?
Announced by HMRC on 13th July 2017, the Making Tax Digital initiative is aimed at making tax submissions easier and more efficient. Businesses (companies and sole traders) that have an annual turnover above £85,000 are required to register for Making Tax Digital. If a business’s VAT taxable turnover falls below the VAT registration threshold of £85,000 after they have registered for Making Tax Digital, then the Making Tax Digital mandate will still apply unless the business deregisters from VAT, or meets another exception criterion, i.e. insolvency.
While businesses that have a turnover of less than £85,000 per year are not required to register for Making Tax Digital, HMRC is recommending the adoption of this technology, as it will future proof the business for potential growth and will also streamline the filing process. Businesses will be able to use software to submit their quarterly VAT reports digitally, which HMRC expects will reduce the overall amount of submission errors. The Making Tax Digital initiative also aims to help promote better financial diligence, forecasting, and planning.
One common misconception of Making Tax Digital is that it will require more work on the part of the businesses to file their VAT reports. However, as most businesses are already required to submit quarterly VAT reports to HMRC, the frequency of submission will not change.
Advantages of Making Tax Digital
Making Tax Digital is not a series of hurdles to make filing your tax more difficult, it’s a streamlined process aimed at making reporting easier and quicker. Volterra Partners and Intuit QuickBooks reported in The Productivity Payout: UK Small Businesses and the Digital Economy that, sole-traders should see, on average, an increase of £1,900 in annual revenue, while small business with 10-49 employees should an average increase of £18,000. That potential financial gain is likely to come from the following key benefits of Making Tax Digital;
Efficiency and Accuracy - All businesses, regardless of size, can benefit from using software to keep digital records. Software will not only allow for greater business efficiency, but it will also reduce errors in business records that can occur due to manual calculations and paper records. By submitting VAT digitally and reducing filing / processing times, value will be added to businesses by allowing time to be spent elsewhere in their business.
Planning and Integration – By adopting a digital filing system, businesses can better manage their finances and cash flow in real time. The ability to integrate filing software with bank accounts, will make it easier for businesses to develop financial plans and strategies, that automatically adapt to changes in the business financials.
Simplified Filing – By keeping digital records, instead of paper records, it will be easier for businesses to file submissions to HMRC, as well as sharing information with accountants.
1st April 2019
All VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 were required to have registered for the Making Tax Digital initiative.
Over 1 million businesses have now missed the 1st April registration date for Making Tax Digital. HMRC will be more lenient in issuing penalties for the 12 months following 1st April 2019, so long as businesses are making every effort to become compliant with Making Tax Digital. To ensure the first VAT submission after 1st April 2019 is submitted on time, avoiding a late submission penalty, businesses need to make sure they are registered at least one week before the due date of the first VAT return. Due dates for VAT submissions are scheduled 1 month and 7 days after the end of the accounting period.”
Starting in April 2020, HMRC will penalise businesses using a points-based penalties system for late VAT returns, assigning businesses one point per late VAT submission. Once businesses have accumulated enough points to reach the point threshold, they will be fined by HMRC. The point thresholds are based on the frequency of VAT submissions, which is outlined below…
2-point threshold for annual submissions
4-point threshold for quarterly submissions
5-point threshold for monthly submissions
The points accumulated by businesses will not be permanent and will expire after a period of compliance, which is outlined below…
2 compliant submissions for annual submissions
4 compliant submissions for quarterly submissions
6 compliant submissions for monthly submissions
The penalties handed down by HMRC are issued to the businesses rather than to the agents. As a result, it will be important for businesses to ensure they are working with an agent who is prepared and knowledgeable of Making Tax Digital requirements.
1st October 2019
A six-month extension to register for ‘Making Tax Digital’ has been given to businesses with complex requirements that fall into one of the following categories:
Public sector corporations
Businesses / individuals required to make payments on account
Annual accounting scheme users.
Entities whose religious beliefs are incompatible with the use of electronic communications
Impracticality due to age, disability, remoteness of location or another “reasonable” circumstances
Entities undergoing insolvency procedures
Businesses voluntarily registered for VAT, but underneath the VAT threshold.
April 2020 (tentative)
Starting in April 2020, at the earliest, HMRC will mandate that for all businesses with a turnover above the VAT registration threshold of £85,000, all other forms of tax (including income and corporate tax), must be reported through the Making Tax Digital system. However, Making Tax Digital will remain optional for businesses with a turnover below the VAT registration threshold of £85,000.
How to register for Making Tax Digital
Individuals or businesses that have not yet registered for Making Tax Digital can still do so through HMRC on their website, here. For businesses and individuals who wish to have an agent and / or advisor help them through the registration and VAT filing process, they can be appointed to officially register the businesses for Making Tax Digital on their behalf. Once registered with HMRC, businesses will then need to choose HMRC approved software to keep business records and file their VAT digitally in order to remain compliant. A tax agent and / or advisor can assist businesses in choosing software that best fits their business requirements, according to size, sector, and need.
Which software to use
From the 1st April 2019, any software that prepares and sends a VAT return to HMRC in accordance with Making Tax Digital must be compatible with HMRC’s systems. HMRC is not offering its own software products but will partner with commercial software developers who can develop a range of applications that will integrate with HMRC’s systems. The benefit of this approach is that commercial software developers can offer a more flexible and tailored range of options, greater functionality and technical support, that are specifically catered to businesses and sectors. With more software being developed, there are currently 255 software programs which have already been released to help you be Making Tax Digital Compliant, a complete list of can be found on HMRC’s website here.
For businesses that already keep their business records digitally through a spreadsheet, i.e. Microsoft Excel, they must send their tax information from those records to HMRC to be compliant with Making Tax Digital. These businesses will need to use ‘bridging software’, which will take the information from the spreadsheets, sort the required information, and submit the VAT return to HMRC. A list of software programs approved by HMRC can be found here, which can be sorted for ‘bridging’ under ‘software for’.
If your business is not yet registered for Making Tax Digital, contact us using the details below and we can support your business to meet all your Making Tax Digital, accounting and bookkeeping requirements.
Strathearn Strategic Consulting
+44 (0) 7913 413 699