Confused about Making Tax Digital? Don't worry, we're here to shed some light on what Making Tax Digital actually means for you and your business.
There are lots of rumours and scare-mongering about MTD; let's separate the fact from fiction.
Myth 1: Making Tax Digital has been postponed
Although the chancellor, Philip Hammond, has said that the roll out of MTD to other taxes will not happen before 2021, MTD for VAT started as planned on 1 April 2019. Businesses with a turnover above the VAT threshold are now required to keep digital records and submit quarterly returns for VAT purposes only.
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The exact timetable for the next stages is still to be confirmed, but HMRC has said it will widen the scope of Making Tax Digital to include income tax and corporation tax.
Myth 2: Under MTD I'll have to submit four tax returns a year
The media has called MTD a "quarterly tax return" but that's not really the case. Reporting your financial data to HMRC throughout the year will replace the annual tax return but it isn't likely to be the same process. With your business accounts kept up-to-date in accounting software and with a lot of the admin automated, submitting your financial data to HMRC throughout the year should be as simple as checking it over, filling in any missing information and hitting a button to send.
Myth 3: Making Tax Digital is unpopular
Despite some heated commentary on social media, the evidence shows that taxpayers are pretty positive about the prospect of a new digital tax system. In our survey of micro-business owners who had already digitised their bookkeeping, nearly half of 701 business owners polled said they were positive about MTD, compared with just 11% who felt negatively.
Myth 4: HMRC will be snooping on my finances all the time
The use of the phrase "real time" to describe financial reporting under MTD is misleading. HMRC has said that it will process financial data in "as close to real time as possible" but realistically, your figures will only be scrutinised when you submit them to HMRC - which will be at least quarterly.
The collecting and processing of data in this way is intended to give taxpayers more certainty about their tax bill and an up-to-date picture of their tax position throughout the year. There has also been talk of a pay-as-you-go system for MTD, where you'll be able to make payments towards your tax bill as and when you submit updates, although how this might work in practice is still in discussion.
Myth 5: A digital tax system will be too technical for most people
It seems that the proponents of this myth greatly underestimate just how digitally savvy UK taxpayers are. Millions of businesses already manage tax online with 99% of VAT returns, 98% of corporation tax returns and 86% of self assessment returns currently submitted online.
Even if you're one of the 14% who don't submit their self assessment tax returns online, HMRC is providing prompts, advice and support that will make it easy to interact with your digital tax account. Webchat is also available via your digital tax account so you can chat to HMRC at a time that suits you and hopefully never have to listen to that wretched hold music again!
Myth 6: Digital record-keeping is going to be a big hassle
In FreeAgent's 2017 Business Monitor survey, customers said that switching to software had saved them a day a month on average, compared to their previous bookkeeping method. It might take a little bit of time to get used to new software but when you do you'll reap the rewards.
FreeAgent currently enables sole traders and limited company directors to fill and file their self assessment tax return directly to HMRC from the software. Up to 90% of the self-employment form for sole traders is automatically filled as they go about their daily business.
Being able to see your tax liabilities build up over time prevents nasty last-minute surprises, while other time-consuming tasks, such as chasing unpaid invoices, are automated.
Myth 7: My spreadsheet is just as good as any tax software
Spreadsheets are great for some tasks, but a powerful accounting system goes way beyond anything that even the most sophisticated spreadsheet can manage.
Your spreadsheet could also be giving you false information. According to MarketWatch, 88% of spreadsheets contain errors. Accuracy is the cornerstone of any good business plan - do you really want to be taking risks?
Myth 8: I can opt to submit paper returns instead
As the government moves towards providing a modern digital experience for taxpayers, it's unclear whether the paper tax return will survive. HMRC has said: "The appetite for digital services is strong and relying on a predominantly paper-based tax system makes no sense in the 21st century".
Without confirmation about alternatives for those exempt from MTD, we might yet see a minority still able to file paper returns; however, it's looking increasingly likely that it's the end of the line for pen and paper.
Myth 9: MTD discriminates against people who are not good with computers
This is an important issue and it's one that HMRC has considered; it has published a list of those who will be exempt from MTD, including those who genuinely cannot use digital tools "for any reason". People who "genuinely cannot use digital tools" will be able to nominate someone to update their accounts for them or give information to HMRC by phone.
Myth 10: I don't have to worry about this yet
VAT-registered businesses with turnover above the VAT threshold are now required to keep their records digitally (since 1 April 2019.) For businesses with turnover under the VAT threshold and above the £10,000 threshold, MTD will roll out later.
Myth 11: HMRC will give me free accounting software
HMRC has confirmed that it will not be providing software directly. However, it "will ensure that free apps and software products are available, but many businesses and their advisers will choose to use commercially-available tax software packages".
In reality, it's up to you to find a digital accounting solution that works for your business. With MTD for VAT now in force, you need to transition to digital record-keeping.
Myth 12: Making Tax Digital means I'll need to keep extra records
The aim of Making Tax Digital is to simplify the UK's tax system and businesses will not need to keep any more records than they do already. With this goal in mind, forcing businesses to keep extra records would be counterproductive.
This guide is based on an article supplied by FreeAgent.