Is your business ready for Making Tax Digital?

7 January 2019

You may have heard of Making Tax Digital (MTD) in the news, but what exactly is it and how will it affect you and your business?

In 2017, Her Majesty’s Revenue and Customs (HMRC) announced that all businesses and individuals will have to file their accounting information digitally. It is a significant change and the end of the annual tax return to be replaced by an online tax account with all your information in one place. Most businesses will need to use online software or “apps” to keep business records. The days of manual record keeping will be over.

Who needs to be compliant?

A common misconception of MTD is that all UK VAT registered business need to be compliant by 1 April 2019.

This is not the case however, and only UK VAT registered businesses with a turnover above £85,000 will need to keep digital records and submit VAT returns to HMRC using MTD compatible software. 

For a very small minority of businesses with more complex requirements, HMRC are deferring the deadline to 1 October 2019.

If after being required to comply, VAT taxable turnover falls below the VAT registration threshold, MTD still applies, unless the business deregisters from VAT or meets one of the other exception criteria, such as insolvency.

The deadlines for sending VAT returns and making payments are not changing.

What is classed as ‘turnover’ for VAT purposes?

Turnover for VAT purposes often does not include rental income from residential lettings which may be classed as exempt for VAT purposes. If your annual turnover for VAT purposes is below the threshold then you are NOT required to be MTD compliant by 1 April 2019. However, you may need to be compliant in the future.

If your annual turnover is near the threshold you should monitor this in line with HMRC guidelines.

What classifies as ‘digital’?

Digital means that records need to be maintained in a format that can be directly or indirectly linked to HMRC when submitting VAT returns.

Handwritten records are NOT classified as digital, and spreadsheets can only be used if also using a “bridging” software.  If you are bookkeeping on these methods alone, then you will either need to transfer to one of the software platforms recommended by HMRC or use bridging software which enables data to be sent from spreadsheets to HMRC.

Cloud accounting software is a good solution and there are other significant benefits to your business:

  • It’s in the cloud so you can get a clear view of your finances any time any place
  • You can run your business from anywhere in the world, including at home or on your mobile device
  • It automatically grabs bank receipts and payments in real time
  • You can use your mobile device to photograph or scan purchase invoices and expenses and upload these to the software. 

“If it’s not broke why fix it?”

Although this change may be daunting, keeping digital records will also bring along with it many benefits.

You will be able to see which parts of the business are most profitable, where costs need to be cut and how much money is owed to and from the business, which greatly helps cash flow.

Many business owners who have taken the leap to convert to a digital system have said they would never go back due to the ease of use, time saved and the greater control they have over business finances.

Will ‘splitting’ the business mean we avoid having to become MTD compliant?

Some businesses have considered ‘splitting up’ certain parts of their business to reduce the turnover so it falls below the £85,000 threshold in the hope that they will no longer need to be MTD compliant. This is unlikely to work - the enterprises will still have financial, economic and organisational links and therefore HMRC may identify this as one business.

Can I still keep different sets of records for each enterprise?

You can still maintain separate records for each enterprise in order to track income and expenses accurately and to monitor profitability. 

What can I do now to ensure my business is compliant?

When choosing an MTD compliant software, it is vital to consider which will one is most suited to the individual needs of your business. At Ellacotts we have a dedicated team of cloud accounting experts who can help you find the right solution and ensure you are MTD ready. 

We have teamed up with bridging software companies to enable our clients to be MTD compliant whilst still using spreadsheets. We are also certified in the installation and operation of cloud accounting software which is HMRC approved and specifically designed for small and medium sized businesses.

If you would like to find out more about MTD and cloud accounting solutions, please contact Charlotte Toemaes on ctoemaes@ellacotts.co.uk or call 01295 250401.