How Will Making Tax Digital Work?
How Will Making Tax Digital Work?
Our experts here at Software Advisory Service get a lot of enquiries regarding Making Tax Digital. In this e-guide, we will take a closer look at how this new legislation will affect you and your business - and what you can do to ensure that you comply. It’s time to lift the fog on Making Tax Digital.
Firstly, Will Making Tax Digital Actually Happen?
Despite popular belief, Making Tax Digital has not been scrapped.
After being postponed several times, the first part of the project is now confirmed for April 2019. However, this is not a change that will happen overnight. To ensure that no individual or organisation fall behind in the digitization process, the government will be launching the pilot project slowly and steadily. In the pilot round, organisations will only be required to use the system in order to meet their VAT obligations. Smaller businesses, with a turnover below the VAT threshold (85,000), can use the system if they want to.
The full adaption is predicted to take place before 2022.
But What Is Making Tax Digital?
In a nutshell, Making Tax Digital is simply a long-promised shift to a fully digital system.
According to the government: “The way you interact with the tax system is changing. (...) it will become increasingly digital and most businesses, the self-employed, and landlords will need to use software or apps to keep their business records.”
Simply put, the aim of the digitalization is to make it easier for both individuals and organisations to get their taxes right. The government is led by an ambition “to become one of the most digitally advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply”.
The Four Pillars of Making Tax Digital
1. Tax in Real Time
With the new system in place, HMRC will attempt to collect and process data affecting your tax as close to real time as possible. Not only can this prevent errors, but it can also avoid that tax due or repayments owed are not building up.
In short, this means the end of the annual tax return.
2.Better Use of Information
The digitalisation will increase the flow of information, meaning that the HMRC can easier receive information on you from banks, building societies and employers. This can make your tax account a one-stop solution for gaining financial overview.
Additionally, you can also access and edit the information HMRC holds on you, thereby making sure that details are always complete and correct.
3. A Single Financial Account
The government wants to make it easier for you to get a full overview of your financial situation, and they explain in a statement that “At the moment, most taxpayers cannot see a single picture of their liabilities and entitlements in one place - we are changing that. By 2020, customers will be able to see a comprehensive financial picture in their digital account, just like they can with online banking”.
4. Digital Interaction with Customers
Making Tax Digital will make it easier than ever before to communicate and interact with HMRC digitally. Your digital account will be developed further to give you a real time view of your tax affairs, along with advice and support through webchat and secure messaging.
This will hopefully mean the end to long telephone queues and vague responses.
How Can You Comply to Making Tax Digital?
We can all agree that Making Tax Digital is a step in the right direction. However, it will require some effort from UK organisations in order to fully comply to the changes. But it looks like the new system will get a warm welcome from most businesses - and perhaps especially since it can help organisations save quite a lot of money.
HMRC can report that plenty of businesses have been slacking when filling out forms in the past, and between 2014 and 2015 over £3.5 billion of revenue was lost due to mistakes in VAT returns alone.
A fully modern and digital tax system makes it easier for organisations to get their numbers right the first time around, thereby mitigating the risk of errors and reducing the cost of expensive mistakes. Additionally, it removes the uncertainty businesses face if HMRC is forced to intervene.
With the deadline coming closer, it’s imperative that you start the process and prepare for compliance with the new legislation. As of April 2019, you will no longer be able to submit your VAT on HMRC’s online services - in other words, you will need a software solution to do your taxes. As the new system demands digital record-keeping, you will need a robust and dynamic software that communicates directly with HMRC’s system in order to send your financial reports.
At the moment, there are only 13 software providers in the UK that complies with HMRC’s demands.
How To Pick Your Next Financial Software Solution?
As a conclusion, HMRC now expects UK businesses to use one of the approved commercial software to keep track of their tax affairs digitally. The UK government is clearly taking a step in the right direction, but it also makes picking the right software a wee bit more challenging.
However, transitioning to the new legislation will be way easier if you already have a robust software solution in place. By Implementing a financial system now, you will benefit from a streamlined and easily processed reporting. It will also means less stress and a shorter turnaround when April 2019 comes around.
Do you need to start looking for a software, but don’t know where to start? Reach out to one of our in-house experts at Software Advisory Service, and we’ll help you become fully compliant with Making Tax Digital.
The future will be digital, so make sure that your finances are too.
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