How Does Making Tax Digital Affect SMEs?

HMRC’s Making Tax Digital rollout for VAT submissions began on 1 April 2019, forcing businesses with a turnover of £85,000+ per annum to submit their VAT returns via approved-only, cloud-compliant software.

Whereas SMEs were previously able to submit their VAT returns by mail or by going directly to HMRC’s VAT portal, this is no longer allowed under the MTD system.

Businesses who are voluntarily VAT-registered but who have a taxable turnover of less than £85,000 are not yet required to follow the MTD regime. They will, however, be required to do so after 1 April 2022.

What is Making Tax Digital?

Making Tax Digital is an umbrella term used by HMRC to make tax and VAT submissions entirely digital and, to some degree, semi-automated using approved software.

The intent is to reduce human error which might cause overpaying or underpaying on one’s returns, as well as to clamp down more forcefully on tax evasion.

Currently, the Exchequer estimates that around £8.6 billion is not being collected on taxes, £3.1 billion of which was unpaid despite all due diligence from the taxpayer (i.e. human error).

When will other tax returns fall under the Making Tax Digital umbrella?

The UK government intends to make Corporation Tax Returns digital by no sooner than 2026.

Sole traders and landlords with income over £10,000 per annum will be required to follow MTD rules on or after 6 April 2023.

What must SMEs do to comply with MTD?

If there is anything which the 2020 COVID-19 pandemic taught us, it is that many firms were not prepared in the slightest for a digital-only approach to doing business.

In response to repeated nationwide lockdowns, companies scrambled to get some semblance of remote working solutions up and running so that their employees could work from home. These actions included urgently signing up for video-conferencing and team collaboration tools such as Zoom, Slack, Microsoft Teams and even cloud-based CRM software such as Hubspot and Salesforce.

Implementing Making Tax Digital in your business would be even more complicated.

Whereas it won’t do much to your bottom line if you invest in, say, the wrong video conferencing tool, signing up for an MTD solution requires a little more forethought.

If you are currently doing your tax on paper (it is surprisingly common, by the way), complying with HMRC’s new Making Tax Digital system will require you to adopt one of the approved MTD software solutions.

Many of these solutions offer a nominal first-month fee or a full trial-version. But that’s not the problem: The problem is the manual labour required to transfer everything over to the new system. It’s not merely a matter of signing up for a  video-conferencing solution and then hoping for the best. You actually have to put in quite some hours of work to get your accounting transferred to the new system.

To be ready for when MTD goes live for all tax returns — corporation taxes and income tax — you should transfer your accounting to an approved system now rather than later.

Some of our favourite systems which are also MTD-compliant, include:

• Quickbooks
• Xero
• FreeAgent

And, of course, we would be more than happy to assist you in getting set up on each of these systems.

Is Making Tax Digital right for all SMEs?

Aside from the fact that MTD is currently required by law for VAT submissions and will soon be a requirement for corporate tax and income tax submissions, one cannot help but ask the question, “Is MTD right for your business?”

In most cases, companies will find it salutary to start using cloud-based accounting software. They can reduce human error and speed up one’s accounting and bookkeeping tremendously.

The problem lies, really, in the fee for such tools, especially for extremely small businesses who, in these uncertain times, might be operating hand-to-mouth.

The good news is that there are also free tools available which are compliant with MTD such as Quickfile, Blokio, Avalara and others. (We have not tested any of these solutions, but they do exist.)

Of course, one should also keep in mind what possible tax savings will occur as a result of using a system that is designed to minimise human error. Also, tools such as FreeAgent tend to be more affordable because they are aimed at freelancers, sole traders and smaller businesses.

The implementation of Making Tax Digital has not come without its criticisers. One estimate puts the total cost for implementing MTD at around £280 per business while a less conservative estimate puts it at an average of nearly £3,000 per business!

Right or wrong, you do need to be prepared. And you can be prepared if you start testing various tools now.

Who knows, someday you might ask yourself how you ever got along without software in the first place.