Making Tax Digital

Do I have to file my business taxes online?

If you run a small business and, given the crazy nature of the past eight months, neglected to prioritise year-end tax filings, HM Revenue & Customs’ next phase of Making Tax Digital might compel you to link your accounts digitally to underlying ledgers. Will you need to rethink the way you report your taxes to HMRC?

Without doubt, technology is influencing everything we do nowadays, and how we manage our interactions and tax filings via HMRC is part of that. If you run your business through a corporate vehicle, then Making Tax Digital (MTD) (the Treasury’s plan to improve the efficiency of tax filing) will change the way you file returns in due course.

HMRC issued its consultation document on the proposals on November 12th with responses required by March 5th, 2021. The consultation document sets out its desire for businesses to make more regular submissions as well as an annual tax return. There will also be a requirement for tax submission calculations to be digitally linked to your underlying ledgers. There will inevitably be a refinement of the more detailed proposals included in the consultation document next year before we see draft legislation in 2022-23.

Forward looking companies are taking their first steps to streamline their use of technology and improve their processes to prepare for this change. Disparate data sources often need to be considered and brought together to manage this effectively. Getting this right will reduce the year-end burden and increase your ability to forecast your cash flow.

Many people are taking the opportunity now to move to a monthly reporting cycle to improve the accuracy of those forecasts. If you do not operate through a corporate vehicle, and your annual business or property income exceeds £10,000 annually, then MTD for income tax will apply to you from April 6th, 2023.

MTD for income tax will require you to retain your records digitally and link the outputs from those records through to your tax filings. This may sound complicated, but there are some simple steps that you can take now which will put you in good shape for this change.

First, retain your records in some form of digital ledger system. Keeping your records in a single location makes sense, and you can use a spreadsheet for this if you do not have an electronic general ledger. Set a logical and simple-to-follow structure and make sure you stick to it.

Second, take a look at the free versions of the MTD for income tax submission software. There are a number available currently and more is expected to be introduced over time. Looking at the type of data they require and the way you upload your data will help you to start to structure your underlying ledger outputs. In order to avoid complexities further down the line, it is important to start this process now. Establish a simple set of digital records which will support an upload to one of the ‘MTD for income tax’ software solutions. This will help you be in the right place to ensure you can remain compliant when 2023 arrives.

Finally, do not forget that any expenses you incur in relation to remaining compliant are, of course, tax deductible.

Many business owners have understandably been preoccupied since the spring with the day-to-day running of their businesses and have struggled to find time for annual accounting. While the government has extended various deadlines during the crisis, you still need to meet them in order to avoid the steep penalties that come with late filing and payment. You will need to submit your 2019-20 personal self-assessment tax return by the online submission deadline of January 31st, 2021, if you have not already done so.

Likewise, if you manage a limited company, the filing deadline for accounts with Companies House has been extended to 12 months from the company accounting year-end. The tax return is due on the same date.

However, HMRC will still expect any tax payment nine months and one day from the year-end date. The need to meet these statutory deadlines while also dealing with the impact of the pandemic on your business is causing a lot of anxiety for business owners.

To date, we have only seen the introduction of the MTD scheme for VAT, but HMRC has earmarked start dates for quarterly digital reporting for other taxes. These are expected from April 2023, with trial periods starting soon. The idea behind MTD is to make tax submissions more effective, efficient and, importantly, easier for you.

For further information, please contact your Prosperis adviser or call 01423 223640 or email us below for a free, no obligation consultation.