What is Making Tax Digital and what does it mean for Company Directors and Small Business Owners?
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Last month’s blog focused on the legal responsibilities of company directors and how they can mitigate the risk of getting things wrong and falling foul of the law. The level of potential criminal and civil risk for company directors has increased over recent years, with tougher regulation introduced covering a range of areas. Company directors are also subject to a number of statutory requirements including a duty to keep proper books and records and therefore must closely monitor the everyday operations of their business. Tax evasion is a key area, with HMRC crucially having the power to investigate and prosecute. With Making Tax Digital coming into force this month, one of the biggest shakeups of the UK taxation system for years, company directors need to ensure that their business is fully compliant.
What is Making Tax Digital?
According to HM Revenue & Customs, over 2000 businesses signed up for Making Tax Digital for VAT each day (1st March 2019, Press Release, One month to go before introduction of Making Tax Digital for VAT, https://www.gov.uk/government/news/one-month-to-go-before-introduction-of-making-tax-digital-for-vat). The crucial question is, what is Making Tax Digital (MTD) and who does it affect?
From April 2019, the majority of VAT registered businesses with a taxable turnover above the VAT threshold (currently set at £85,000) will be mandated to keep digital VAT records and submit their returns quarterly using MTD compatible software (MTD information from gov.uk website).
You might ask why MTD is being introduced. Let’s hear it straight from the horse’s mouth, according to HM Revenue & Customs: “Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.” (reference Policy Paper, Overview of Making Tax Digital, Updated 15 March 2019 https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital). Therefore, it is hoped that MTD will result in fewer inaccurate returns and more accurate real time accounting, making businesses more efficient, in theory.
What does Making Tax Digital mean for company directors?
This transformational change to the tax system will apply to business of all structures. MTD applies to sole traders, partnerships, landlords, limited partnerships, trusts and charities. There is a six-month deferral date of October 2019 for only the most complex businesses. So, company directors need to be prepared or face possible investigation or fines by HMRC.
MTD shouldn’t be intimidating for SMEs, it’s about adapting to change and gradually migrating to and embracing a more digitally oriented accounting, finance and budget planning system within the business. That said, for company directors it is essential they ensure that accurate record keeping is in place and that MTD procedures are being followed to the letter.
The Small Business Enterprise and Employment Act 2015 places more emphasis on the director’s role over their companies’ filing requirements and transparency. The director must therefore monitor (in-house) the implementation of MTD who will be involved on a day-to-day basis and not just rely on accountants.
Of course, company directors are not accountants but are well advised to familiarise themselves with the basics of financial and accounting management. A basic understanding will help ensure that MTD needs are being met across the business. In particular, company directors need to monitor the move to compliant MTD software.
Ditch the spreadsheets!
For some small businesses, MTD means getting rid of their established spreadsheet system and rising to the challenge of using software. VAT registered businesses (above the VAT threshold) are required to use software to submit their VAT returns from 1st April 2019.
When it comes to software, there are several options, from budget to high spend, HMRC does not provide software. Your choice will very much depend on the size and type of business you run. Software providers include SAGE, Kashflow, Pandle, Qero and QuickBooks to name a few.
As a company director, you have overall responsibility for making sure the accountancy software your business uses is Making Tax Digital compatible. Submitting returns through the HMRC Gateway and by post is no longer possible under MTD regulations.
How will your business benefit from Making Tax Digital?
As with anything new, MTD can seem rather overwhelming and there will be a period of adjustment as you get used to the software and procedures. However, by adopting new systems and processes you can make your life much easier. For company directors of small business, MTD may well save time to focus on other aspects of the business and you could find it easier to manage cashflow.
Though eventually MTD should make life easier, you may need extra support in the short term. There is help out there, starting with your accountant as your first port of call, however it is crucial that you find the software supplier best suited to your business, who can provide the right level of support and help with training. Don’t know who to turn to? Please get in touch with the Be Rescued team, we can help.
How we can help
Be Rescued can guide company directors through the basics, so they have a better understanding of how financial accounting and record keeping apply to their business, to help ensure a smooth digital transition for Making Tax Digital.
For further information on Making Tax Digital see:
https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital
Call the Be Rescued team on 01366 387 672, we’re here to help demystify Making Tax Digital for micro and small businesses.