What Making Tax Digital means for SMEs

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What Making Tax Digital means for SMEs

Tax compliance is a vital issue for all businesses, from sole traders and small and medium-sized enterprises (SMEs) to the largest multinationals. But the government has grown concerned that too many firms are making mistakes when they're filling in their tax returns.

In fact, it believes the amount of tax that hasn't been collected because of carelessness and avoidable errors adds up to more than £8 billion a year.

This is why HM Revenue & Customs (HMRC) is looking to overhaul the process, in a way that enables firms to get it right first time and not feel like they're being punished if they make an honest mistake.

Hence Making Tax Digital, a scheme that will give all businesses access to a personalised digital tax account and report on a quarterly rather than annual basis. 

It's hoped this will give businesses a better idea of their tax position throughout the year and help SMEs meet their tax obligations with less expense and disruption.

But Making Tax Digital has prompted plenty of concerns. For instance, the House of Lords Economic Affairs Committee recently stated that while the idea behind it is sound, the rollout is being forced through too quickly and is imposing unnecessary burdens on small businesses.

The government has responded to these concerns by making a slight concession - delaying the implementation of Making Tax Digital until April 2019 for any firm with an annual turnover below the £83,000 VAT registration threshold. 

Meanwhile, those with a turnover of less than £10,000 a year will be exempted from the changes.

So SMEs have been given a bit more breathing room, but the task of actually preparing for Making Tax Digital still remains.

Worryingly, a recent survey by UK200Group suggests this could be a huge job, as it found 65 per cent of SMEs don't currently use software to manage their accounts.

That's a lot of businesses who might be in for a shock in two years' time, unless they use the intervening period to get used to digital accounting and make sure their systems are fit for purpose.

Making Tax Digital: The details

HMRC believes both businesses and individuals now expect a modern digital experience from all sorts of service providers. 

Indeed, it has pointed out that new technology is continuing to transform how they do everything from communicate and trade to travel, bank and shop. As a result, it believes the tax system needs to be brought into line.

"The appetite for digital services is strong and relying on a predominantly paper-based tax system makes no sense in the 21st century," HMRC said. 

The organisation believes the key benefits of Making Tax Digital are as follows:

Better use of information

When Making Tax Digital is in place, businesses will not be required to submit data already possessed by HMRC or that it can obtain from elsewhere.

At the same time, SMEs will be able to see what information HMRC holds about them and check it is accurate and complete.

This information will then be used to provide a more tailored service to taxpayers that reflects their individual circumstances.

A real-time view of tax

Under the current system, SMEs have to wait until the end of the year to know how much tax they should pay. Making Tax Digital will enable tax information to be collected and processed almost in real-time, thereby reducing the chances of errors taking place.

A comprehensive financial picture

Taxpayers can't currently go to a single place to see their tax liabilities and entitlements. But Making Tax Digital will offer exactly that in a digital account, similar to what people are used to with online banking.

Digital interaction

HMRC believes Making Tax Digital will improve communications with taxpayers, as they can deal with tax affairs at a time that suits them, get a personalised picture of their tax affairs and receive prompts and advice when they need it. Furthermore, people can get in touch via a secure messaging and webchat tool.

What can SMEs do?

Lease IT equipment

Making Tax Digital relies on businesses having an adequate IT infrastructure in place, but for SMEs running on modest budgets, they won't have been rushing to purchase the latest technology.

According to the UK200Group, 27 per cent of SMEs use computers for bookkeeping but believe they will have to update their systems.  

IT leasing could therefore be an option, as it gives SMEs access to the latest models and allows them to upgrade their devices when they need to - without absorbing the huge costs that come with purchasing new technology outright.

Get familiar with accountancy software

As we pointed out earlier, nearly two-thirds of SMEs don't use software to manage their accounts at the moment.

In fact, the UK200Group survey shows that nearly one in four still use manual bookkeeping, while almost one in five use the shoebox-method - getting their accountant to fill in details on their end of year tax return.

Making Tax Digital will therefore have a big impact on how they manage their accounts and force them to get used to a brand new way of operating.

This is one big reason why the government had been under such pressure to delay its implementation for SMEs, as they now have an extra 12 months to obtain and get used to maintaining accounting records digitally and get any advice they need to ensure a smooth transition.

However, some want the government to go further to make the process even smoother for those that don't use accounting software.

For instance, Deloitte head of tax policy Bill Dodwell said: "Starting with those most likely already to have digital accounting systems should make it easier to introduce this major change.

"Allowing businesses to use spreadsheets to keep data, or to act as a 'bridge' between bespoke accounting systems and HMRC will be a key part of the transition."

Do your research into accounting software

There are many options available on the market and the right choice for you will depend on the size and nature of your business. For instance, many smaller ventures will not necessarily require a highly bespoke solution and can use software that is easily available and affordable.

So find out what is available that might suit your needs and speak to fellow business owners to see which ones they would recommend. 

Train your staff

When you are bringing in new technology, software and internal processes, keep the relevant employees in the loop throughout so they know what changes are being made and why. Your accounting processes will be much more resilient if your entire finance department is up to speed with the new system.

Conclusion

Making Tax Digital represents the biggest change in how the tax regime operates in many years, and the fact the government has been forced to delay its implementation for SMEs is a measure of how many smaller firms aren't ready for it just yet.

Long-established habits will have to change, with businesses getting used to reporting on a quarterly rather than annual basis and upgrading to more sophisticated systems, beyond pads of paper and Excel spreadsheets.

Now is therefore the time for SMEs to start preparing and make sure they have the equipment and the knowhow to adapt successfully with a minimum of disruption.