The UK government has decided to push forward with making tax digital in order to make tax simpler for individuals and businesses and to help prevent common tax mistakes. This system should be more effective, efficient and easier than ever before.
VAT registered businesses with a taxable turnover are now required to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns. The deadline for this transition is 1st April 2021*, after which you could be at risk of penalties or fines for incorrect filing.
Legality aside making tax digital is the future for small businesses. With easy to use software tools like Xero, accounting practices are simple, saving you hours of administrative tasks and able to focus on selling more.
- due to COVID-19 the timeline may shift.
Making Tax Digital.
What does making tax digital mean?
Making Tax Digital or MTD means that rather than submitting annual tax returns, business owners will have a digital account that they will be expected to update regularly.
What are the deadlines?
In terms of deadlines, it’s hard to pin down an exact date or timeline particularly with the effects of COVID19 and extensions to the scheme.
The process of MTD began in 2019 and it is the “soft landing” period that is due to end come April 2021. Below are the official guidelines.
“For VAT periods starting on or after 1 April 2021, your systems must use digital links for any transfer or exchange of data between software programs, products or applications used as functional compatible software, as stipulated in legislation”
Put simply after April 1st 2021, it is no longer legal for business owners or bookkeepers to copy and paste to select and move information within software programs that relate to their VAT returns. As an alternative, the government urges businesses to use the aforementioned “digital links” which includes emailing spreadsheets, memory stick transfers and CSV exports. To find out more visit the government website here.
It’s also worth acknowledging the future timeline which states that by,
April 2022: MTD will be compulsory for businesses with a turnover below the £85,000 VAT threshold.
April 2023: MTD will apply to taxpayers who file Income Tax Self Assessments for business or property income of more than £10,000 a year.
As it stands there will be no late filing penalties for at least a year while the new system beds in. After that, businesses may suffer penalties for late file returns.
Why is Tax being made digital?
The HMRC have decided to introduce the MTD scheme as a result of the large number of tax errors reported to have been made. It was estimated that between 2018-2019 errors in tax, cost the Exchequer £8.5 billion. As well as an attempt to save money and reduce errors, MTD is trying to push more business owners into the digital area to modernise their systems.
In the long run this should save businesses time and money, and also help the exchequer raise funds via taxes more efficiently.
Who is exempt from making tax digital?
The HMRC have stated that they expect most business owners to be able to meet the requirements for MTD however they have accepted that there will be a small number of exemptions to the rules.
In order to be exempt, the HMRC must be satisfied that:
It is not reasonably practical for you to use digital tools to keep your business records or file VAT returns.
You or your business are involved in an insolvency procedure.
Your business is run entirely by members of a religious society whose beliefs are incompatible with keeping electronic records and digital communications.
If you are already exempt from filing VAT returns online or your taxable turnover is below the VAT registration threshold, you needn’t sign up for MTD or apply for an exception.
How to Digitise your Tax in 3 easy steps
1. Speak with your accountant and ensure you are required to register for Making Tax digital.
Before making any changes to your Tax Filing ensure you are eligible based on the criteria mentioned previously. You can speak with your Accountant who will be able to advise you on what documentation you need and maybe provide you with guidance on a digital software. There may be a tool they already use or have been recommended.
2. Get your documentation in order.
If no exception applies, you will need to enter your Government Gateway account or give your accountant access to do so and fill out the appropriate fields. The Digital records that the HMRC have directed that you keep include:
- business name and contact details.
- VAT number and details of any schemes used
- VAT on supplies made and received
- adjustments to returns
- time of supply (tax point)
- rate of VAT charged on supplies made
- reverse charge transactions (if your software doesn't record them, you need to record them twice as a supply made and a supply received)
daily gross takings (DGT) if you use a retail scheme
- purchases of assets you can reclaim tax on if you use the Flat Rate Scheme
value of sales made and total output tax on Gold Accounting Scheme purchases (if applicable)
- documents covering multiple supplies made or received on behalf of your business (by volunteers, third party businesses or employees)
Once you have gathered this information you finally need to agree to participation in the MTD scheme.
3. Choose your software and link to your account
There are a number of accounting software providers available that are approved by the HMRC. Research the different providers and decide who is most appropriate based on your needs i.e size, expertise, budget. As mentioned you may also want to liaise with your accountant as they may have a software they already have experience using and therefore will make the transition simple.
We recommend cloud-based accounting software that enables you to integrate your accounting with sales channels to create simplified reports.
What are the benefits of Digital Accounting
Digital accounting has been created to help make accounting easier, quicker, and more efficient for businesses of all sizes. Here are the 5 key benefits of digital accounting:
Real time data for strategic planning
Unlike traditional accounting, digital accounting will allow you to review your financial position at any time with regular updates rather than receiving accounting information at the year end.
This visibility prevents any unexpectancies and allows you to act strategically on a daily basis. Rather than being reactive you can be proactive, getting a head of competitors with the knowledge that you are financially supported.
Ease of Use
Making Tax digital is a much faster way to file your VAT returns. Rather than waste hours focusing on administrative duties and organising reports come the end of the financial year, all your information will be stored digitally and ready to hit send.
Save on Penalties
Although currently still working during a transition period, MTD will become a legal requirement with businesses who refuse (without exception) at risk of facing major penalties as a result.
There is no better time than now to try and move your business into the digital era particularly with the wealth of information available online and the accounting software providers available to assist you.
As with all digital systems, using software to submit your Tax reports will reduce the likelihood of incorrect filing or human error. As mentioned accounting software makes it painfully easy to manage the financial accounts and with simple automations you can make sure your fillings are accurate and stored securely in the cloud.
Advanced Reporting & Integrations
Digital tax is not a new concept, many businesses have been using cloud based accounting software for years. The reason? You can integrate your accounting software with your Point of sale in order and ecommerce to access more detailed real time reports. With integrated cloud software you can set budgets, track results and report on your full business performance, anytime, anywhere.
Having considered the What, When and Why of MTD, it’s now time to focus on the who. What platforms are available for small retailers to help them make the transition into digital VAT returns?
Xero is one of the best cloud-based accounting platforms available to small businesses, offering a simple user interface and an affordable monthly subscription and the opportunity for a free trial.
Xero provides all the tools you need to save hours of admin work, removing the need for manual re-entry. You can use Xero for tax submission, automatic bank reconciliation and also online payroll.
A huge benefit of Xero is it’s network of integrations that enable you to connect all your systems with your accounting software.
For example AirPOS and Xero integrate so you can automatically sync your sales data between both platforms allowing you to run your business more efficiently.
Xero Pricing starts from £10 per month
Quickbooks is another popular option for many small businesses being both affordable and also boasting a wide range of capabilities available to try on a free trial.
Quickbooks allows you to track income, expenses, manage invoices and generate customisable reports all on one platform.
Quickbooks Pricing starts from £6 per month.
Sage is a great accountancy tool for small businesses looking for a simple cloud based platform without any unnecessary features or functionalities.
Out of all the cloud based platforms available they offer arguably the most versatile solution with pricing tiers to fit any business type. Business owners who need very basic functionality can open a Sage account for as little as £3.60 per month however those who require more specialised tools have the option to upgrade to another Sage Suite.
Sage is perfectly fitted to both small businesses and medium-large offering specific packages based on size with vast functionalities that extend past accounting.
Sage Pricing starts from £3.60 per month.
Fresh books is another popular cloud-based accounting service and specifically designed for small business owners. It is relatively simple making it easy to use and has enough functionality to make it the perfect tool to manage your accounts.
Fresh books offers all of the tools expected from an accounting software such as Invoicing, reporting and expenses etc but it focuses on keeping things simple making it the ideal solution for low volume retailers.
A key benefit of Fresh Books is their level of support. They have a thorough help centre on their site as well as offering live chat and for those who prefer advice directly from a human, there is an easy to find phone number available.
Pricing Starts from £4.40 per month.
Common misconceptions of Making Tax Digital
Often we hear reports of hacking or outages when it comes to digital data however digitising your Tax can only make your filling more secure particularly if using a cloud based platform. With traditional accounting practices your records can easily be misplaced or stolen with no other back ups. Cloud based systems mean that even if your laptop breaks you will never lose any data, you can simply login in on another device and access your records.
In terms of data security, cloud based systems are backed up by sophisticated encrypted connections making it increasingly difficult for someone to hack your records or steal information. Cloud based accountancy platforms will have teams dedicated to protecting your data.
Although most of the security liability lies with your software providers there are some steps you can take to protect your data.
- Make sure your passwords are secure
- Try and choose a provider who offers double factor authentication
- Ensure you have antivirus software installed on your device
MTD is complicated
Understably if not from a technical background the thought of changing your systems can be daunting, however with cloud based systems such as Xero it’s simple to move your business online.
There are also a wealth of guides available online taking you step by step through the process to ensure you make no mistakes in your accounting.
It was found that Businesses that subscribed to MTD for VAT with fully integrated accounting and tax software in March 2020 reported spending less time on their tax. Despite many thinking it may be too complex, retailers who embrace MTD actually find they make less mistakes and save more time on administrative tasks.
Becoming Digital will lead to more errors
With worries of overcomplicated systems comes additional fear of errors. If you have been using a traditional system for many years, change will naturally seem uncomfortable and difficult however moving to a digital platform will actually lead to more accurate accounting and a reduced number of errors.
“61% of businesses said they have previously lost receipts – and errors also occur in the manual transposition of data.”
MTD removes any opportunity for these kinds of errors with a series of automations. Your fillings will be recorded and stored without the need for any physical intervention.
This couldn't be further from the truth with cloud based platforms subscription costs starting from anywhere as low at £3 per month.
With digital software you will be saving money, only paying for the functionality you need and keeping your systems all in one platform.
AirPOS and Making Tax Digital (Xero Integration)
Make your transition to digital tax simple integrating AirPOS Point of Sale with Xero accounting software. Xero is one of the most powerful cloud based accounting platforms on the market and with AirPOS you can automatically sync your sales data with your accounts enabling you to run your business more efficiently.
Our accounting integration will transform how you manage your business enabling you to set budgets, track results and report on your full business performance any time anywhere. Integrating AirPOS with Xero also saves you time removing the need for manual administration duties and offers seamless online payroll for your staff.
Find out how AirPOS customers Comic Book Guys have been able to run their successful retail business utilising integrations with Xero to manage their daily operations and reports.
If interested in finding out more about how you can digitise your Tax and AirPOS's Integration with Xero arrange a free demo with one of our team.