Whether you\u2019re new to the conversation surrounding the government\u2019s Making Tax Digital (MTD) initiative or you\u2019ve been following it from the beginning, chances are that you have some questions. If so, you\u2019re certainly not alone \u2014 the uncertainty around the contents of the initiative, when it might actually roll out, and how it\u2019s going to affect your business has a lot of small business owners worried and wondering.<\/p>\n
Every business is different, so the exact way that MTD plays out in your business is going to be unique. But there are a few commonalities that we can speak to.<\/p>\n
However you\u2019re keeping up with your business finances now, you\u2019re going to have to make sure that you\u2019re using a digital accounting system so you can upload your financial data into the HMRC interface. While this shouldn\u2019t be too much of a transition if you\u2019re already using accounting software, you will need to transfer your data into some sort of digital system if you\u2019re one of the many UK small business owners who\u2019s still using a spreadsheet, handwritten ledgers or the beloved \u201cshoebox\u201d method.<\/p>\n
HMRC has been careful to say that they\u2019re aware that there will be cases where people truly can\u2019t use the MTD interface \u2014 for example, those who live in rural areas where there\u2019s not enough broadband coverage to upload data \u2014 and they will provide alternatives. But for the most part, tax is going digital, and so should your bookkeeping.<\/p>\n
Under MTD, you don\u2019t file one big annual tax return a year. Instead, you update your data in the MTD interface at least once a quarter. This means that you may have to spend some more time keeping on top of your bookkeeping throughout the year, especially if you\u2019re the kind of person who\u2019s used to throwing all your receipts into a box and handing them off to your accountant at the end of the year.<\/p>\n
The upside of using a streamlined digital system is that all of your data is collected continuously in one place. This means that you won\u2019t have to spend time getting the runaround from HMRC as they ask you for data you\u2019ve already shared with them or hanging around waiting for letters in the post. Everything will be digital, including your communication with HMRC, so that should make things more efficient.<\/p>\n
Similarly, since you\u2019ll have been updating your tax information throughout the year, you won\u2019t have to spend hours sorting it out at the end of the year like you used to have to do with an annual tax return. It will already be uploaded and sorted, so filing should be much simpler and easier.<\/p>\n
While the finer details of MTD are still very much up in the air, it\u2019s unlikely that you\u2019ll have to pay more tax as a result of participating in it. While your tax bill might go up if you\u2019ve previously been under-reporting or making errors in your tax return, it won\u2019t be because of changes in tax law. It will simply be correcting the errors so you\u2019ll be paying what you actually owe \u2014 and avoiding the possibility of HMRC deciding to do a compliance check. You might even find that you pay less tax; because you\u2019ll need to keep your records up to date, there\u2019s less likelihood that you\u2019ll misplace receipts and declaring profits that are actually higher than they should be.<\/p>\n
Along those same lines, if you\u2019ve been playing a bit fast and loose with your taxes, that will likely be more difficult to do with MTD. Since you\u2019re filing data quarterly and all your information is gathered in one place, there will be less room for errors (unintentional or not-so-unintentional). HMRC hopes that this will help them collect some of the billions of pounds that currently slip through the cracks \u2014 and in turn use it to fund programmes that benefit everyone.<\/p>\n
One of the most helpful parts of MTD for small business owners is the real-time tax aspect. While right now you have to wait until the end of the year to find out how much you owe on your tax bill, real-time tax will give you a sense of your how your tax obligations are shaping up throughout the year. Every time you upload your data into the MTD interface, it will automatically calculate the amount of tax you\u2019ll need to pay, allowing you to set aside money throughout the year and make more accurate financial projections.<\/p>\n
While there will be some changes as the initiative rolls out, the streamlined filing process, reduced chance for errors, and insight into your tax obligations throughout the year will not only make the tax process easier \u2014 it should help small business owners make more informed financial decisions.<\/p>\n