Making Tax Digital has been delayed but you still need to prepare…

It seems like every man and his dog has been talking about Making Tax Digital (MTD) since it was first announced back in 2015, when George Osbourne announced government plans to modernise the tax system.

In the beginning, the deadline for MTD was 2018, however, this was evidently far too adventurous with delays hitting the news on a regular basis.

Why did Making Tax Digital get delayed?

There were many concerns across the accounting spectrum with more questions being created than answers and so the timetable was amended. Currently, businesses that turnover above the VAT threshold (£85,000) will have to keep records digitally starting from 2019. Those who are under will not be required until 2020.

Has faith been lost in MTD?

Not at all, there is still support for the MTD initiative and to modernise the tax system. The Treasury has just accepted that they need to slacken the timetable for businesses to be able to transition comfortably.

This decision was made after listening and taking on board concerns of the Treasury Select Committee, which was driven by the newly elected chair Nicky Morgan.

What does this mean?

This means that businesses and landlords now have time to make the switch and start keeping records digital more voluntarily. Allowing them to switch at their own pace before it becomes mandatory.

What will change?

In the early stages of MTD, HMRC will not be requiring more information than usual as VAT already requires quarterly returns.

HMRC have decided to continue piloting MTD and will start with VAT at the end of this year but only on a small, private scale. Public piloting will not start until Spring 2018, at the earliest.

Why did the government decide to introduce MTD in the first place?

MTD was a key part in the government’s plans to ultimately make it easier for individuals to handle their tax and financial affairs, introducing the end of annual tax returns – which is usually a sore point for the self-employed and business owners.

MTD was first introduced with the hope of achieving the following:

• The HMRC making better use of information – having digital records will help stop individuals giving the HMRC information it already has. It will also give individuals the ability to check the information HMRC has and easily correct any wrong information.
• Real time tax – individuals will no longer have to wait until the end of the year to know how much tax they owe, HMRC will collect and process information affecting tax as close to real time as possible.
• Only needing a single financial account – like online banking, individuals will be able to see a comprehensive financial overview in their digital account.
• Interacting digitally with customers – individuals will be able to interact digitally with HMRC when it suits them and because their software will be linked to HMRC systems, they will also be able to send and receive information inhouse from their software.

Example of how the new plans will affect business owners and the self-employed…

Meet Nick who owns a deli cob van. Nick is 39 and has a family with two children aged 4 and 9. Being self-employed enables him to fit work around his children’s needs. Nick is married, both work full time however money is still a little tight. In 2016/16, Nick didn’t have a great year and his taxable profit was around £16,500. He finds it easy to pick up the things he needs for his job when doing the family’s shopping, so business expenses are jumbled in with personal items.

Whilst Nick loves cooking, baking and any cool kitchen gadgets and utensils, he still prefers to keep on paper where he is working and how many miles he drives. His invoices are also hand-written. Some clients pay in cash (if it’s a small project) whereas others do a bank transfer online. He receives bank statements through the post, so she can tick off when clients pay. He puts times a side once a month and then files them.

Receipts are kept in a Tupperware box and business items are highlighted on receipts, so that he can identify them later. Each tax year, it takes Nick all afternoon to add up invoices, miles and expenses. He then does his tax return online, filing in ‘three line’ accounts – income, expenses and profit.

When MTD comes into play, Nick will be required to keep records digitally including income and expenses.  These records need to be documented as close as possible to the point of the transaction. HMRC will want him to keep records in ‘real time’. There are many ways to do this e.g. taking pictures of invoices and receipts and logging mileage via an app on her android or iPhone. He could also record transactions using software on the home computer.

Nick is worried and sceptical of MTD as he is worried that it will take up time that he doesn’t have and he’ll make mistakes. He is used to the system he has in place now and doesn’t like change.

He will also have to bear in mind that he will be required to report quarterly figures of his income and expenses to HMRC online. This will provide Nick with an estimate of his tax bill allowing him to budget for it. So, he understands some of the benefits.

This is a benefit for businesses that are somewhat straightforward, where income builds up evenly across the tax year. However, those in a seasonal trade will not get an accurate estimate of their tax due from quarterly figures.

What now?

It’s great to know this information but what do I, as self-employed or a business owner, need to do now? Surely, I have loads of time, I don’t need to worry about this now…

No! This couldn’t be further from the truth! We recommend that you use this time wisely and get yourself prepared. Start trailing software and slowly introducing new systems. This way, any issues that crop up, can be ironed out well before the deadline, giving you peace of mind.

Russell Geary, Director of RDG and member of ACCA, commented, “whilst the delay is a sigh of relief for many business owners, landlords and the self-employed, individuals should be using this time wisely by starting to get themselves prepared at their own pace. We all fall victim to waiting until the last minute but this a massive change that will take time to adapt and get used to.

We would be happy to discuss MTD with you, there will be no cost and no obligation. Simply fill in your details below and we will be in touch: