Making Tax Digital... the Return!
Currently, all VAT-registered businesses are required to follow the Making Tax Digital (MTD) rules by maintaining digital records and using software to submit their VAT returns.
However, MTD is also now coming for unincorporated businesses… if you are self-employed or a landlord with income above £10,000, you will be required to follow the rules from 6 April 2024. Partnerships with individuals as partners will fall within the scope of MTD from 6 April 2025.
And non-VAT-registered limited companies are not escaping either! HMRC is proposing MTD for corporation tax will not apply until 2026 at the earliest, but it is coming.
As a result, if you’re keeping shoeboxes of receipts or have even progressed to a simple spreadsheet, the way you keep your accounting records will need to change. Under MTD, you will need to:
- Maintain your books on HMRC compliant software
- Keep your processing up to date
- Ensure that your data is accurate and consistent
- Perform regular bank reconciliations
- Review the information produced by the software – does it makes sense?
If you are not currently maintaining your books on digital accounting software, we would recommend acting sooner rather than later. The first step is to choose the software that you would like to use… Xero, Quickbooks, Freeagent are the current market leaders. The next step is to determine when the optimal time is to sign up / move across. Our advice would be the sooner the better as looking at this now will make the transition to MTD compliance much easier… always better to jump before you’re pushed!
If you are already using digital software, there are still steps that you must take to ensure that you are ready for MTD. The focus needs to be on ensuring that the data in your software is accurate and fully reconciled, so that it is ready to be submitted to HMRC and in turn, provide a robust basis for your tax liability. You should also be reviewing reports extracted from your software to sense check the data.
There are of course other advantages to moving beyond the trusty spreadsheet to digital, cloud-based software:
- The data is live – the software automatically imports from your online bank feed and learns where to meaningfully post transactions.
- Flexibility to access your information wherever, whenever and however you want – for example, while sitting on the beach via your smartphone you could check how the profit is looking for the month.
- Let credit control be a thing of the past – the software can be set up to automatically issue regular invoice reminders to chase those repeat offenders.
- Grows with you – the software has a comprehensive range of add-on apps to provide a solution tailored to your industry and business type.
- Keeps cash flowing – the software encourages customers to pay quicker by generating electronic invoices, tracking whether the invoice has been opened or not and allowing customer to pay online to streamline the process.
- Collaborate with your accountant – no need to export a back-up, print anything off or give your accountant a box of paperwork at the year-end as they can have real-time access to your data.
Although MTD isn’t coming for a couple of years, our advice is to act early, take advantage of the benefits above and get into the habit of maintaining accurate records on digital software as soon as possible.