Making Tax Digital, or MTD, has been on the agenda for some time now. Following delays and changes to the staggered introduction, most UK businesses now need to comply with MTD requirements for VAT submissions, ensuring they have compatible cloud computing software.
However, there is a larger group of companies that are not at the VAT registration threshold and should be conscious of when the plans to digitise the tax system are likely to affect their affairs, with scheduled transitions for Corporation Tax and Income Tax Self-Assessment (ITSA) on the horizon.
Let’s look at how organisations can adapt to pre-empt compliance requirements and become familiar with the complexities of MTD in good time before the next transitional phase begins to impact their reporting requirements and a cloud accounting system becomes mandatory.
A Recap of the Changes Introduced By Making Tax Digital
The basics of MTD are that the government and HMRC will require submissions and declarations to be made digitally using compliant cloud-based software packages that allow users to submit financial information directly through the tax office portal.
For most businesses, traditional accounting software will be incompatible, necessitating advice and guidance from an experienced commercial accountancy team to select viable, future-proof and efficient upgraded cloud-based accounting software systems that are MTD-ready.
As it stands, the current changes and anticipated phases include:
- April 2022 – MTD for VAT returns applies to all VAT-registered UK companies.
- April 2026 – MTD will apply to Income Tax Self-Assessment (ITSA) returns for self-employed taxpayers or small business landlords with an income of £50,000 or above.
- April 2026 – MTD will roll out to Corporation Tax returns, although this could potentially be postponed further. There may be a staged introduction for small business owners, although this is not yet confirmed.
- April 2027 – MTD is expected to be introduced for ITSA sole traders and taxpayers with self-employment or property incomes above £30,000.
We do not yet have clarification about when MTD will apply to general partnerships or whether any of these expected introduction dates will change again. However, it remains essential for taxpayers across the scope of UK taxation to understand what these reforms will mean for them.
Services and Support Offered By Cloud Accounting Providers
The primary objective of MTD is to consolidate and simplify financial information reporting mechanisms. Rather than having the choice of paper-based filing, online submissions or software-based returns, the goal is for every business, VAT payer and taxpayer to use a unified system to declare their taxable activities through cloud accounting software.
Stalled implementations aside, there is no doubt that cloud-based accounting is a step-change in financial reporting, and there is no potential for any business to disregard MTD or assume it will not affect them sooner or later.
As a cloud-based accounting specialist, James Todd & Co can help at every stage, from offering independent recommendations about the cloud accounting software best suited to your business activities and sector to supporting transitions from outdated systems to new solutions with cloud-based accounting functionality.
Cloud accounting offers many advantages above and beyond MTD. Financial data and records are stored through secure servers in the cloud, accessible via an internet connection rather than on a desktop-based hard drive or static server.
Businesses switching to cloud-based software can use real-time reporting, generate sales orders remotely, have secure access to their accounting software on any device, and permit multiple users to access reports concurrently to save time.
Advanced cloud accounting software replaces the manual aspects of double-entry bookkeeping and can handle data entry, cash flow forecasts and multiple currencies with live bank feeds updated automatically, alongside other functions to handle payroll and small business forecasts.
How to Prepare for MTD Compliance
The first task we’d recommend for any company looking to prepare for MTD is to audit and assess all of the business processes and accounting software in use by the organisation. Having a detailed and comprehensive log is a useful starting point since you can determine how and where your data is currently stored and how you extract that data for VAT return and tax reporting purposes.
From there, it is important not only to select cloud accounting software that is fit for your business and sector but to look at the other benefits. Some software packages are ideally suited to specific industries, for example, or for remote-based or hybrid workforces.
There are several popular options for small business accounting software. As a Xero Gold Champion Partner and Sage Accounting Certified Expert, we can offer ample support comparing either of these solutions.
It may also be necessary to assess the in-house reporting processes you follow and think about whether your bookkeeping and financial staff have a sufficient understanding of MTD legislation and accounting needs to manage the transition. Many clients work with our team to receive independent guidance throughout as part of a tiered change management approach.
Having a well-laid-out plan helps companies and small business owners to see which records they currently store manually through paper-based bookkeeping or spreadsheets and use that information to pick software solutions that are streamlined, efficient, and appropriate.
Registering for MTD at the Applicable Time
As our summary above shows, not all businesses, nor all taxes, are immediately subject to MTD reforms. It is possible that additional postponements will impact the indicative dates when the tax office currently expects to introduce the next tranches of MTD enrolment.
However, knowing when and how this may influence your business and being poised to respond and register is a significant advantage, not least for your peace of mind.
In most cases, you will be notified by HMRC when it expects you to transition from an existing VAT, ITSA or Corporation Tax basis over to the new MTD system. You can also check in with our team of accomplished chartered accountants at any time whether you are unsure when MTD will apply to you, would like a consultation to discuss the appropriate software solutions, or have any questions about MTD now and into the future.