“Making Tax Digital”. Most small or medium-sized business owners will have a strong reaction to those three little words. The government’s new plan, requiring SMEs to report their VAT records digitally instead of using the traditional HMRC portal, has been billed as a step to move tax accounting into the modern age.
Six years after HMRC hauled PAYE reporting into the digital world, they are now coming for VAT – but this only applies to SMEs which turn over more than £85,000 per year. If you are registered to pay VAT and you’re normally scrabbling around for receipts and invoices in a cardboard box every quarter, the Making Tax Digital deadline of 1 April 2019 might be good news for you.
“It’s not as scary or as difficult as it might seem,” says Mark Macklin, associate manager at Moore Stephens. “There will be a certain learning curve but HMRC has agreed to a soft landing period for the first year. If you and your business are taking small steps towards becoming compliant, you should be fine.”
So don’t panic. The details are outlined in HMRC’s booklet with the inspiring title of “700/22”, but we’ve distilled the basic facts, and how SME owners can best prepare, with the help of some expert advice.
Getting the right software
“The key is to get onto some sort of compatible software,” says Della Hudson, a business consultant for Hudson Business Accountants and Advisers. “The sooner you start using the software, the sooner you can understand it and get the benefits.”
“Digital” means you either use cloud-based accounting software such as Xero or you work on Excel spreadsheets, manually typing in each transaction, and use bridging software to collate those files and send directly to HMRC. While some bridging software is free, most accountancy software is paid for – and you can claim the costs as a business expense. HMRC has a list of more than 100 software providers it is working with.
“It is quite simple: a business might start on a spreadsheet and move on to accounting software and that path is well trodden,” says Della. “If you are struggling, your software provider or your accountant will be there to help you.”
Make sure your software provider will be compliant before the deadline – if not, it might be time to review the way you work. Mark Macklin added that bridging tools appear to be the only current realistic option for certain people, like partly exempt businesses or SMEs who are on any kind of special VAT accounting scheme.
Using a digital business account makes digital tax easier
With Starling, it’s easy. Business customers can sync their bank account data with Xero (and soon many more accounting softwares as our Marketplace integrations grow.) These full integrations make the reporting requirements even smoother. If you use another provider of online accounting software or want to send everything directly to an accountant, you can download your CSV files and then upload or email them.
Brian Palmer, tax policy expert at the Association of Accounting Technicians, encouraged SME owners to do as much research as possible before the deadline and even think about running their old and new VAT reporting systems in parallel for the last quarter of the financial year, depending on the size of the business.
“It means you still rely on the old system but the new one mirrors what is going on and it can build your confidence before the deadline,” he explains.
Digitising paper invoices and receipts
Although reporting VAT will become digital, how you store your records is up to you. For example, if someone sends you a paper invoice, it only becomes digital once you enter it into your chosen software system or spreadsheet.
“Record your transactions digitally prior to supplying the VAT returns, because you can’t just take a pile of invoices, add them all up and enter the total sum,” says Brian. “There needs to be a digital entry per invoice.”
To make HMRC happy, you are only required to record four pieces of information: the net sales figure, the net cost figure, the net purchase figure and the net VAT figure. Other details, such as the name of your business and VAT registration number, should also be recorded digitally.
Brian insists that the new system – which, again, applies to the first time you submit a VAT return after 1 April – should improve record keeping, lessen mistakes and decrease your chance of being audited.
“It should empower business owners and make them more engaged with the tax system,” he says.
So, a new system that involves cloud-based software, less room for error and more transparency. What’s not to like?
And, from 2020, the government is also looking into reporting digitally for income and corporate tax – this could affect all SMEs, even those not registered to pay VAT.
“That is the direction of travel, and it makes sense to prepare as it’s a case of when rather than if,” says Della.