The government’s new plan, Making Tax Digital, has been designed to be the most digitally advanced tax system on the planet. As of 1st April 2019, businesses that turn over more than £85,000 were required to submit their VAT records digitally, instead of using the traditional HMRC portal.
Businesses turning over less than the £85,000 threshold can opt-in the scheme, but it is not compulsory.
If you’re not prepared yet, here we outline the steps you need to take ASAP:
- Sign up for a digital tax account
Firstly, if you don’t already have a digital tax account with HMRC, you’ll need to sign up for one. You can do this through the HMRC website. The account will allow everything to be kept in one place and for tax to be submitted digitally.
- Find the right software
Secondly, you’ll need to find compatible online accounting software to record your transactions and invoices, or bridging software that can collate transactions recorded in an Excel spreadsheet.
Most bridging software is free for the first year. While online accounting software, such as Xero or QuickBooks Online, incurs a monthly fee or upfront charge. However, what you spend on software, you may save in time spent filing accounts, plus you can claim the costs as a business expense.
- Integrate your bank to digital software
Many banks now have digital integrations with online account software providers, e.g Xero, so that your bank transactions can automatically sync with your accounting software, meaning your bank feed will be automatically updated in Xero, in real time. This way you can keep track of transactions instantly without manually downloading or uploading any documents.
- Get connected
Whether you choose to use a PC, laptop, tablet or smartphone; you’re going to need to get online and input data electronically to comply with Making Tax Digital.
- Create digital entries for paper invoices
Next you must create digital entries for paper invoices. If someone sends you an invoice in the post, this needs to be entered into your system or spreadsheet to digitise it. You’ll need to extract and record four key pieces of information: the net sales figure, the net cost figure, the net purchase figure and the net VAT figure. Other business details such as your business name and directors will also need to be recorded digitally.
- Switch to Making Tax Digital for VAT
Even if you haven’t yet hit the VAT threshold, we advise that the sooner businesses start filing tax digitally, the better. This will give you some practice with the new system before it becomes mandatory. If you have an accountant, you’ll have more time to ask questions and iron out any problems.
- Know your dates
Even though MTD is now compulsory for business earning over £85,000. From 1st October 2019 MTD will also be mandatory for all those who were deferred. In April 2020, a date will be confirmed for income and corporation tax compliance.
- Understand the benefits
There are many benefits that individuals and businesses can gain from MTD; businesses will be able to clearly see their data ensuring it is up-to-date and accurate. HMRC will then be able to use the information to tailor their service to their individual customer’s situation. Businesses will also not have to wait to year end to find out the amount of tax they may owe.
- Understand key terms
Terms such as ‘API’ and ‘digital link’ are frequently used around MTD and so it is important you understand what they mean and why they are important. A digital link is important because you won’t be allowed to copy and paste information between programmes or within VAT return working papers. API is used by HMRC to explain how software packages will link to their systems for MTD.
- Avoid financial penalties
All affected companies who cannot comply with the new MTD rules risk financial penalties and this could cause business disruption. While the initial Making Tax Digital deadline of April 2019 only affects around 2.5m businesses with a larger turnover, we expect that smaller businesses will eventually have to follow suit and comply with MTD so its best to get things in place as soon as possible.
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