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The road to digital tax planning

More than 40 years after predictions about the “paperless office” became commonplace, one small corner of the working world is going digital.

This spring sees the start of a government initiative, Making Tax Digital (MTD), which aims to get individuals and businesses to submit tax returns online. The plan is that the scheme will be rolled out in phases over the next couple of years, starting with VAT this April; but there are plenty of voices calling for an extension in order to give more businesses the chance to comply.

“HMRC are not listening to small businesses,” according to Lord Forsyth of Drumlean, chairman of the House of Lords Economic Committee, which in November published a report recommending voluntary instead of mandatory compliance with the VAT changes in April. “Small businesses will not be ready for this significant change to their practices, especially with Brexit taking place three days earlier.”

Digital accounting can help small business owners keep better track of their income and outgoings, improving the ability to make accurate and timely decisions

Yet despite the predictions of doom, many businesses are already onboard with the change. If you use one of the popular branded software accounting packages such as Xero, you are probably already compliant (check HMRC’s website here for a list of compatible software).

So how do you know what your business needs to do? A first step is to understand the change, which requires businesses to maintain digital accounting records – that is, using MTD-compatible software to record and file your returns. Paper records will, ultimately, stop meeting the legal requirements for tax legislation.

Such a move will likely benefit your business by increasing efficiency, particularly if records are moved to the cloud. Digital accounting can help small business owners keep better track of their income and outgoings, improving the ability to make accurate and timely decisions.

Crucial is the use of digital record-keeping. You may already file your returns online via HMRC’s website, but this does not mean compliance; the data transfer must be between software programmes, rather than re-keyed or cut-and-pasted.

For HMRC, digital returns will not only increase efficiencies but save money; according to HMRC’s own estimates, avoidable mistakes – essentially, input errors – cost the Exchequer more than £9 billion a year.

The next step is to familiarise yourself with the MTD timetable, which phases in the digital requirement for different taxes over a period of several years. It starts this April with MTD for VAT; so most VAT-registered businesses will have to file VAT returns digitally this spring (there is a six-month deferral period for about 3.5 per cent of HMRC’s companies, including public sector entities and not-for-profit organisations). Some small businesses with complex needs will have to delay starting to file under MTD until October 2019.

If you are under the current turnover threshold of £85,000, you have until April 2020 to meet the digital requirements. Smaller business can continue to use HMRC’s online portal to file returns – though you can elect to submit your records digitally, a sensible move for any organisation already set up to do so.

The deadline for digital records for other taxes such as income or corporation tax has been pushed back to April 2020 at the earliest, giving most smaller businesses at least two years to adapt to the changes. It is a welcome breather, given the slow pace of change; according to a survey from the Institute of Chartered Accounts (ICAEW), carried out in July, only 38 per cent of businesses use accounting software. A quarter of businesses still use paper-based accounting systems.

It may seem annoying, but it could benefit your business in the long term

According to Anita Monteith, ICAEW Technical Tax Manager: “We support HMRC’s ambition to increase the use of digital technology, but we are concerned that many businesses are not going to be ready for implementation in April 2019. The lack of awareness among businesses about MTD is of concern and needs to be addressed: the communications on MTD do not appear to be getting through to VAT-registered businesses.”

ICAEW’s survey found that only half (51 per cent) of all UK VAT-registered businesses had heard of MTD for VAT, with 46 per cent not using accounting software.

“Given the need to review existing systems and potentially evaluate, purchase and test new software, this is a worry,” said Ms Monteith. “MTD for VAT is a major change in tax administration and it is important for the UK tax system that it is a success: this is too important to be rushed.”

According to the House of Lords report, some 400,000 companies (around a third of those affected) are still not aware they will have to file digitally from this April. Adrian Rudd, chair of the CIOT/ATT Digitalisation and Agent Strategy Working Group (DASWG), said: “These knowledge gaps could mean normally compliant firms fail to fulfil their new obligations.”

There will be penalties for companies that fail to meet the new requirements, which will be treated as a late submission and fined accordingly. However, HMRC has confirmed there will be a grace period, with no financial penalties for record-keeping failures till March 2020.

Finally, if you are not already registered with HMRC, make sure you leave enough time to do so; it can take up to three weeks to complete the registration process.

MTD may sound scary, but many businesses do not need to worry, as their existing software will already be compliant. If you find it is not, use this deadline as an opportunity to improve and upgrade your record-keeping. It may seem annoying, but it could benefit your business in the long term.