What are the implications of Making Tax Digital for small businesses?
You probably still have some questions about HMRC’s Making Tax Digital (MTD) initiative.
If that is the case, you are not alone — many small business owners and their accountants are uncertain about how exactly the initiative is going to work and how it’s going to affect their businesses.
The issue of how MTD will actually affect your clients’ businesses is a difficult one to address specifically, as every business is different. However, there are some aspects that are certain:
They’ll have to go digital
Your clients will need to start using a digital accounting system so they can upload their financial information.
If they are already using accounting software, this shouldn’t be too much of a transition. However, if they are still using Excel or the ‘shoebox’ method, they will need to transfer their information into a digital system.
In such cases where people truly can’t access the MTD interface (for instance, those who live in rural areas where there’s not enough broadband coverage to upload data) HMRC will provide an alternative. But for the most part, tax is going digital, and so should their bookkeeping.
MTD might mean spending more time on bookkeeping…
Under MTD, you don’t file one big annual tax return. Instead, you update your data in the MTD interface at least once a quarter. This means your clients may have to spend more time keeping on top of their bookkeeping throughout the year, especially if they’re the kind of people who are used to throwing all their receipts in a box and handing them over to you at the end of the year.
…but it will probably end up saving you and your clients time
Your clients will actually end up saving time, as they won’t need to spend hours on the phone with HMRC or filing their old-fashioned annual tax return. Their data is recorded continuously in one place, so everything will be digital and more efficient.
Similarly, as your clients will have been updating their tax information periodically throughout the year, you won’t have to spend hours sorting it out at the end of the year in the same way as you would with an annual tax return. It will already be uploaded and sorted, so filing should be much simpler and quicker.
Businesses won’t pay more tax because of MTD
It’s unlikely that your clients will have to pay more tax as a result of MTD. Their tax bill may go up if they’ve previously been under-reporting or making errors in their tax returns, but it won’t be solely because of changes in tax law. In fact, they might actually find themselves paying less tax, because they’ll need to keep their records up to date. Therefore it’s less likely that they’ll misplace receipts or declare profits that are higher than they should be.
It will be harder to avoid tax with MTD
As your clients will be filing data quarterly and all the information will be saved in one place, there will be less room for error, whether they are unintentional or not-so-unintentional.
HMRC hopes this will help them collect some of the billions of pounds that currently slip through the cracks — and in turn use it to fund programmes that benefit everyone.
A more complete picture of your clients’ finances
The real time aspect of MTD will mean your clients no longer need to wait until the end of the year to learn how much they owe on their tax bill, giving them a much better sense of how their their tax obligations are shaping up during the year. Every time data is uploaded into the MTD interface, it will automatically calculate the amount of tax they need to pay, allowing your clients to put money aside throughout the year and be better prepared.
Better business decisions
MTD will bring some necessary changes. However, the streamlined filing process, reduced chance of errors and real time insight into tax obligations throughout the year will make the process easier and help small business owners and their accountants make more informed financial decisions.