By 2020, HMRC will have moved to a fully digital tax system where:
- bureaucratic form-filling is eradicated as taxpayers should never have to tell HMRC information it already knows;
- Unnecessary time delays are eliminated — the tax system operates much more closely to ‘real time’,
- Keeping everyone up to date and removing the risk of missed deadlines
- Unnecessary penalties, debts arising and errors in the system being carried forward from one year to the next; and taxpayers have access to digital accounts with the information HMRC needs automatically uploaded, bringing an end to the tax return.
What is Making Tax Digital?
A Government led initiative that transform the tax system whereby the tax administration is more efficient so that it operates much more closely to ‘real time’. Business/Individuals will be able to see, through their digital accounts, a real-time view of their tax and a calculation of the tax due. By reporting information closer to real time, businesses/Individuals will find it easier to understand how much tax they owe, giving them far more certainty. HMRC already holds data about individuals and businesses e.g payroll, bank interest, tax credits and this will filter into the tax account
Tax payers are expected to upload information on quarterly basis with a end of year return – five reporting requirements per year using either free or commercial software.
Timeline of MTD
- Reporting for income tax by landlords and self-employed and partnership businesses from April 2018 with Turnover greater than the VAT threshold of £85,000
- VAT reporting from April 2019 and unincorporated businesses earning more than £10,000
- Corporation tax reporting from April 2020
How will it work ?
In principal, Using bank feeds and scanning software where data can be uploaded automatically and allocated to the various account categories. In reality how it will works no one yet knows exactly. It is understood spreadsheets can be linked to the App.
Does everyone need to become Digital ?
There will be a threshold but currently stands at £10,000 (effective 2019) though due to the one year delay those unincorporated businesses with turnover greater than £85,000 will be the first batch initiated on the Making Tax Digital Scheme. Cash Accounting will be allowable again subject to a threshold. There will be some additional exemptions i.e inability to use electronic communication for reasons including religious beliefs, age, disability or location. It will become clearer how Making Tax Digital in April 2017 will work with the publication of the draft legislation and the pilot programme.
While in essence it seems a logical way to go especially using the data HMRC already holds to populate the tax accounts. What seems illogical is four quarterly updates and year end adjustment this may just create additional work for all. In addition the threshold of £10,000 seems too low.
This is an extremely ambitious plan to roll out the biggest change in the tax system within short space of time and HMRC have still not provide clarity or mechanics how this work in practice e.g how the Apps will integrate with HMRC software.
It is unlikely HMRC will postpone Making Tax Digital hence businesses/individuals and accountants need to start planning now
However, inexplicably the public are unaware of the changes that will take place next year. The government has yet to publicise, advertise and disseminate information about make tax digital
MTD may come a belated surprise to many though the penalties will be relaxed for the first year
What can be done to prepare ?
With Make Tax Digital, Individuals/businesses are required to use accounting software unless exempt which may only apply to a minority. Irrespective of Making Tax Digital, an accounting software can save time and money, Spreadsheets and manual keeping of records is time consuming and inefficient and fair chance of omitting receipts hence end up paying more tax. Furthermore, keep paper records – filing and storage is just an inefficient allocation of time and space.
What Software ?
Accounting Software has changed drastically over the last five years with significant innovation and improvements Almost all accounting software is now on the cloud and therefore accessed from anywhere.
The most popular and well known accounting software for small businesses are Quickbooks, Xero and Sage.
What to look for in an accounting software ?
Dash board should be nicely presented with colours and fonts to match. Menu items should be clearly accessible. Dashboard should summarise the position of the business and include key metrics. Most importantly it must be user friendly to those that have not used accounting software previously.
Move from quote/estimate to invoicing and generate an invoice quickly and easily. The Template should be editable with colours and design changeable.
Generating key information for decision makers is fundamental to the success of a business. All Software will have standard reports – Profit and Loss, Balance Sheet etc but detailed reports breaking down into products, services and location are required for some businesses to understand for example the profitability per product or location and ensure the optimum utilisation of resources
With the development of third parties Apps, accounting software must be able to integrate directly with the Apps to facilitate automation. Automation saves time. money and prevents errors from manual input. Invoice Scanning software is just one of the Apps that has revolutionised Book-keeping.
Some Accounting Software offers Email Support Only. However human touch is a better and quicker option to a problem as time is critical in business.
There isn’t a major difference in the Price between the major accounting software houses but some do offer 6 month to 12 month deals which can mean huge reductions
Accounting Software has developed at a remarkable rate over the last few years and there is no finished article on the market. There are still key omissions in some of the aforementioned software but they are working hard to build in the missing functionality especially as competition is fierce.
Overall, QuickBooks does tick all the right boxes in the six categories above.
Electrician visiting a client to give a quote for installing a circuit board and a maintenance contract
- Uses Triplog Mileage App as soon as he gets in the VAN the mileage app starts running and stops as soon as the vehicle is stationery. The Mileage App through GPRS provides the dates as well as the locations he has travelled to and from and can annotate with more information like client name and reason for travel. On his App he can simply convert the trips to Business or leave it as the default setting as Business.
- He meets his client enters a quote on the Quickbook apps and emails to the client while at the meeting. Once the client accepts the quote he generates an invoice by one click of a button and emails it to the client. He can use Quickbooks to take payment in advance by Paypal/Credit card plus set up a direct debit to set up payment schedule for the maintenance contact
- On the Triplog Mileage Cloud Accounting software he can quickly submit the business mileage to Quickbooks. Quickbooks keeps a log of all the business mileage owed to the Electrician and he can pay himself at any time
- The Electrician is director and 100% shareholder of a Limited Company that is VAT Registered. He gets the circuit board supplier to send invoices to a email address and the software called Entryless reads the invoices picking up the Name, Date, Invoice Number, Amount, VAT. Once the invoice is approved in Entryless – the invoices goes into Quickbooks with the actual copy of the invoice attached without any further manual intervention.
- When his company pays the supplier and the customer pays the company. The bank transactions are automatically downloaded to Quickbooks and software is clever enough to pop up a match between the Payment/Receipt and Purchase/Sales Invoice
- Once all transactions are matched and some are coded to the correct category e,g bank charges. Bank Reconciliation can be completed with entering the bank statement balance and clicking the button reconcile.
- Profit and Loss Report will show how much the company is making in terms of profit and provide an indication of the dividends that can taken out subject to overall limit of retained profits. Accounts Receivable will show how is owed and overdue and same for Accounts Payable. Other more detailed reports like Key Performance Indicators can be generated with a flick of a button and customised accordingly.VAT Report can be generated again by clicking a button and information used to file the VAT Return.
- Finally, the Company can file the payroll though Quickbooks on behalf of the Director. If the company utilises CIS subcontractors or is engaged by a CIS contractor then the software can deal with the accounting, generate CIS Reports and report to HMRC directly on any tax withheld by the CIS Contractor.
- When Making Tax Digital is rolled out the software will be linked to the HMRC system facilitating quarterly filings without much effort.