What is MTD?
Making Tax Digital is an HMRC initiative which affects every VAT registered business from April 2019, and every business from April 2020. This needs action now.
It means that each business has to make a quarterly return online to HMRC like a simplified profit and loss account plus a fifth return after year end.
HMRC Reasons for MTD
We think HMRC has three reasons for doing this, but only the first has been made public. The public reason is that HMRC wants to simplify and speed up tax recording for you, and it’s a cost saving for them.
Our best guess for the second reason, further down the line, is that HMRC may well say that if you can record how much you have earned quarterly, you can pay HMRC quarterly. Apart from the cash flow implications, it does mean that your fifth full return after year end will almost inevitably have some adjustments and if profits are adjusted down, you have overpaid and need to get that back somehow whilst explaining why profits have dropped. This brings us to the real issue.
The most important reason for you is the third. HMRC admit there is a £8bn a year tax gap owing to avoidable mistakes. MTD gives HMRC far more data sooner and therefore far more opportunity to plug this gap by correcting your mistakes, plus penalties and interest. Politically this is a no-brainer. There would be no need to increase taxes to help fill the black hole of public finances, which would upset voters, and we are all supposed to be paying the right amount anyway. It’s an easy win for them. And of course – there is a penalty regime if you get MTD wrong. After all, HMRC would now have “proof” that your bookkeeping isn’t perfect.
What can you do now?
It is essential that your accounting is accurate, up-to-date and ready to upload to the HMRC portal from April 2019 with minimal effort to you. That means cloud accounting. Spreadsheets and manual books will not be allowed. We’ve talked about this in blogs already here.
We’ve already said you need to start now. You need to know that your books are clean and accurate well before they start to interact with a brand-new and possibly buggy HMRC system. You need to be able to defend your records when HMRC come calling. We think you need 12 months of cloud accounting so that you are absolutely sure you know what you are doing and how you are doing it before you start interacting with an HMRC system.
Balancing books is not enough
Don’t think for one moment that balancing your books will be enough. Only last week we’ve come across an example. Bank has been balanced every month, VAT has been reconciled and paid on time, PAYE has been reconciled and paid on time, but the accounts were wrong. In fact, the sales and profits were too high. If you put in a fifth return which comes to less than the sum of the four quarters, that might well trigger a conversation with HMRC.
Eliminate the errors
The figures have to make sense. Either you, or someone, who is on your side, has to understand what they mean and why.
Most bookkeepers stop at balancing – they don’t have the technical skills and training to be able to interpret sets of accounts and find errors. We recognised that this error checking is an essential part of work before anything goes to HMRC. So we’ve put time and effort into procedures ands systems which will allow this to happen with little or no hassle to you. It gives you peace of mind, usually at no extra cost, and can actually be cheaper. And there are some added benefits.
Benefits to you and your business
In fact, it’s better than that because there are benefits to you. Our system should take you less time on the mundane tasks, so you’ve got more time for yourself. We know that clients who have up-to-date and accurate figures make quicker, better decisions so that their businesses grow faster, and they make more profits easily.
Silver lining – extra sales and profits
There’s even a silver lining. Clients have moved their back office to us so that they can concentrate on what they do best. The time gained for them and their admin staff has produced extra sales and profits. We can also predict your tax bills earlier and make suggestions on what you might do to minimise them, so you should earn more, and keep more.