A Simple Explanation of Making Tax Digital
Making Tax Digital (MTD) is a key part of government’s plan to make it easier for taxpayers to get their tax right and keep on top of their affairs, moving tax information (and collection of taxes) online.
This is the direction of all tax jurisdictions across the world and will require the use of software which interfaces with HMRCs new Application Programming Interface (API) Platform. According to HMRC £6.1 billion every year is lost through avoidable errors*
The main motivation for this is to enable HMRC to collect tax more efficiently, eliminate tax errors and make it easier to identify where earnings have been under-declared, whether deliberately or inadvertently.
Following the implementation of MTD, HMRC will remove access to the “direct tools” submission for VAT (over 90% of Vat returns are currently submitted in this way). Accountants and businesses will therefore need to submit VAT returns directly from their chosen software from April 2019, for those above the VAT threshold.
The vast majority of software providers have already allocated developer resource to ensure their software is upgraded to support MTD so there is no reason why you and your clients cannot be “early adopters” of MTD and choose to have your VAT returns submitted using MTD for any VAT period beginning after 1st April 2018.
10 reasons Making Tax Digital will be a force for the good
- Submitting to HMRC will be quicker: The software will link with HMRC meaning that submitting quarterly returns (replacing the annual tax return) can now be as easy as a few clicks.
- Data will be kept up to date: As tax data will be submitted every three months there will be no more ‘rush’ as a tax deadline approaches, therefore you are less likely to forget business expenses.
- Reduces the chances of Mistakes: Using ‘connected software’ means that elementary mistakes, e.g. transposition errors, will be avoided and there will be no more prone to error spreadsheets! Software providers are developing “nudges and prompts” to help eliminate common errors, reducing the need for unwelcome compliance interventions which are expensive and burdensome for both HMRC and its customers.
- Access to real-time figures – MTD requires up to date figures to be maintained. This means that your business records will be more up to date, meaning that you will be able to make business decisions timely, data in hand.
- Year-end accounts can be produced much faster: No need to wait for 9 months after your year end for accountants to produce accounts. Now there will be no reason why accounts can’t be produced within one month of a year-end.
- Cashflow planning will be easier: Accounts being produced much quicker, means tax liabilities can be quantified and provided for in a timely manner – perhaps paying tax early may be an advantage!
- It will be easier to share information between clients and accountants: There is often a “lag” in exchanging information with your accountant and getting the advice businesses want and need. MTD will ensure that your accountant (and you) are using information in real time.
- Tax information will all be held in one place: Bringing together taxpayers’ information in one digital tax account should eventually ensure that, any overpayment of one type of tax will be able to be set against the underpayment of another.
- Prepopulated returns will make submission easier: HMRC’s new API’s prepopulate your tax return, making the process more one of “review and approve” (as, for example in Sweden), rather than collating data from various sources, calculating the amounts to include and submitting. A task we all put off until the last minute!
- Significantly reduced paperwork: As information will be online (remember HMRC now accept electronic receipt records) there will be no need for the hoarding of huge piles of paperwork- everything will be held electronically.
This article was written by My Digital Accounts.