As with shopping, TV, other forms of media and systems of administration, in the age of the internet, eventually everything will take place partially or wholly in a digital environment. This is a natural evolution of technology that provides us with greater convenience and frees up more time for the things that matter, like working on our relationships, or businesses. For this reason, it is not much surprise that HMRC would bring things up-to-date by taking tax records online, and this new development is something that should make tax easier to manage, both for HMRC, and for businesses of all sizes.

As Brighton accountancy firm, Atkinsons Chartered Accountants, points out, the aim of Making Tax Digital (“MTD”) is to have a one-stop, online portal that can be accessed from anywhere to allow businesses and individuals to have a real-time picture of their tax situations. This will occur through a system that integrates data uploaded by the user along with information from third parties, such as banks and employers. The first phase of this will apply to VAT functions, while a voluntary scheme for income tax is also available to taxpayers. There is also an MTD for Individuals transformation project in place, and MTD for corporate tax is expected to follow.

HMRC is working with a number of approved software providers who can store information and pass it to the tax office through a paperless process, and such software includes Quickbooks, Sage and Xero, amongst others.

When does it come into effect?

The pilot for MTD began in April 2018, but it will become mandatory for all businesses in Brighton and elsewhere with a VAT turnover above the VAT threshold, which is currently £85,000, next week, on 1st April 2019. This means the majority of UK businesses will be mandated to the scheme, and while those below the threshold will not need to employ the scheme as yet, HMRC encourages all businesses to make use of the system for the benefits it can offer, such as streamlining your business practices, and easier record-keeping using MTD-compatible software. As the new system will inevitably come into force at some point in the future, it will most probably be advisable for all to upgrade sooner rather than later.

There are some exemptions to the scheme for those unable to easily take on the update, such as not-for-profit organisations, traders based overseas, and those without the practical means to submit their tax returns for a number of causes that may need to be means-tested.

How does it work?

One major difference that MTD will introduce is for taxpayers to be required to upload quarterly summaries of their income and expenditure, and not just at the end of the tax year as has been the case in the past. HMRC have said that this will ensure more continuity of records as well as greater accuracy, and this can be an advantage to businesses and the tax office alike.

Businesses will be required to keep records in digital format, and choose from a list of accredited software packages that can make tax figures clearer, more accessible and more organised, on either a computer or mobile device. Of course, this means that all records will need to take a digital format, so existing paper records will need to be scanned and saved as a PDF or jpeg file.

Those that currently use spreadsheets to summarise VAT transactions will need to ensure the format is MTD compatible, and where necessary ‘bridging software’ may also be used to render documents into HMRC-friendly formats. Before 1st April 2020, taxpayers are allowed to cut and paste records into their final destination in the HMRC system, but from this date all MTD users will need to make sure there are digital links between software products.

Should Brighton businesses be concerned about the new system and the way they will be affected?

The digital developments introduced are unlikely to be very disruptive for most businesses, as more commonly 21st century business practices are already digitised, and the integration of new processes and software that are in line with new HMRC regulations will be relatively easy to take on board. Also, Brighton is a city with some of the highest connectivity in the country, so businesses here are more likely to be ahead in terms of technological issues.

With this being said, alterations in practices and procedures will have less of a negative impact when carried out gradually and seamlessly, so businesses that acclimatise themselves to the new digital environment of tax may avoid the difficulties that sudden changes can potentially bring. For smaller businesses especially, it’s important to keep tax records organised and accurate to avoid potential fines, so stay ahead of your game and make your tax digital.