How can I make my company taxes digital?

Making your small business tax dealings paperless is the future for several reasons. Making tax digital avoids the need for reams of paperwork, it makes the whole process of completing tax returns more efficient and with changes to legislation coming from HMRC, it is vital to meet government requirements.

HMRC is rolling out changes to the way in which taxes are assessed and collected, which it is hoped will make “it easier for individuals and businesses to get their tax right and keep on top of their affairs.” The process, which HMRC is calling Making Tax Digital (MTD), began in 2015 with the personal tax account, and digital VAT was launched in 2019 for businesses with a turnover exceeding the annual VAT threshold of £85,000.

From April 2020, it is expected that HMRC will begin to implement digital taxation for both Income Tax and corporation tax. It is also expected that Making Tax Digital will cover all VAT registered businesses in the future.

This guide will take a look at the steps that business owners need to take in order to comply with Making Tax Digital legislation.

Why is tax going digital?

It is thought by HMRC that the vast majority of business owners wish to report their tax affairs honestly, but by their own estimation, there are over £9bn worth of avoidable errors within reporting each year. Making Tax Digital is designed to eliminate these errors, making the collection of business taxes more accurate.

Covering VAT digitally

All businesses with a turnover of over £85,000 must now keep digital records, in addition to sending digital VAT returns. Businesses with a smaller turnover may still voluntarily sign up for Making Tax Digital, via the HMRC website. 

Records that must be kept in order to complete digital tax returns to HMRC include the time of supply, the value of supply (excluding VAT) and the rate of VAT applicable for each supply. In addition, businesses must report essential information such as business name and principal address, as well as the VAT registration number.

There is a list of compatible software on the HMRC website, which provides data in a format that the HMRC systems can understand and interpret. Digital VAT records must be kept for up to six years.

If the software you currently use is not on the HMRC list of compatible software, for example, if you manage your finances internally using spreadsheets, it is possible to use bridging software in order to create and send the VAT return to HMRC.

Income tax

Sole traders have been able to sign up to Making Tax Digital since 2015, and the major benefit to this is that it eliminates the traditional annual Tax Return. Instead, individuals send their income information digitally to HMRC at least four times a year. All of this happens via the digital tax account, which can be accessed through the HMRC website.

The frequency with which information is sent to HMRC doesn’t call for four separate tax returns and the associated stress that goes with this, it simply requires more regular updates to be made online.

Corporation tax

Very little information about the roll-out of Making Tax Digital in the context of corporation tax is available at the time of writing. The earliest point at which any digital changes will be implemented will be the start of the new financial year in April 2020.

It is widely believed that HMRC is looking at how the rollout of Making Tax Digital for VAT has performed before making firm plans about the digitisation of corporation tax.

Real-time reporting

One aim that HMRC has in relation to Making Tax Digital is to be able to provide reports to businesses in as close to real-time as it can. Rather than providing businesses with a single bill for the year following their tax return, information received will be processed throughout the year, so amounts owing should not have the chance to accumulate.

Penalties looming

HMRC described the first year since Making Tax Digital rolled out for VAT as a ‘soft landing period’, in place to give businesses the opportunity to get their digital affairs in order and report with the frequency and formats required.

Now that this soft landing period is coming to an end, there is a distinct possibility that businesses failing to comply with Making Tax Digital could find themselves incurring penalties. There is even a points system in place for businesses who miss payment dates, leading to fines if multiple dates are missed in succession.

As Making Tax Digital takes place, HMRC hopes to provide businesses and their owners with regular updates on their tax obligations, largely eradicating any major surprises that may have previously occurred following the old style annual tax returns.

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