Making Tax Digital for small businesses and the self-employed

Making Tax Digital is a UK government initiative aiming to make tax administration more effective, more efficient and simpler for taxpayers. But will it?

Making Tax Digital for small businesses and the self-employed

HMRC’s Making Tax Digital initiative will make the task of preparing and filing income taxes quicker, easier, and more accurate.  Eventually.  It would be unrealistic, especially in 2020,  to expect a trouble-free transition, however, a little early preparation will go a long way towards smoothing the process. Change is never easy, and there is a daunting amount of information to absorb here. The vast majority of that information is not relevant for small business owners, self-employed, or sole traders. With that in mind, let’s take a look at the “need to know” details that matter most.

Benefits of Making Tax Digital

By automating the process of collecting financial information and submitting reports directly to the HMRC the number of errors, and concerns about audits or unexpected tax obligations will be reduced or eliminated. When the system is fully integrated, and the bugs are worked out much of the current effort and time spent collecting or searching for financial documents, interpreting tax law, and calculating tax payments will be spent developing the business, bonding with customers, or vacationing with family instead. Those tasks will soon be performed automatically and in real time with individual transactions or at the close of business when the daily receipts are balanced.

This real time reporting and cumulative tax burden calculations will allow the tax payer to better anticipate and budget for their tax obligation at the end of the year.

The Making Tax Digital Timeline

Originally slated to launch in 2017, the snap elections resulted in a significantly later launch date with the first phase finally getting under way 1 April, 2019.

Small businesses and landlords with business or property income above £10,000 will need to make the transition before 6 April 2023.

Some small business owners, sole traders, and self-employed may need to update their existing hardware, and install software before transitioning. These upgrades may require a significant investment of both money and time.


Compatible Software

Having the proper software installed and functioning will optimize your chances of a smooth transition. The Making Tax Digital initiative requires the ability to connect and communicate with your home or office system in real time. The list of compatible software programmes is still a bit sparse but it is expected to expand quickly as the full roll out date draws nearer. HMRC maintains a list of approved software on the official website. As new software programmes are developed, tested, and found to be compatible they will be added to the list.

Absolute

Adminsoft Ltd

APARI Software Ltd

Cirrostratus Exedra Ltd

Forbes

IRIS

MTDsorted

Rhino


Cloud Based Software

The flexibility and scalability of cloud-based software solutions make them the ideal choice when selecting a software solution to integrate with the HMRC Making Tax Digital platform.

Sage

Xero

Quickbooks

Bx

FreeAgent

QuickFile


Making Tax Digital Pilot Scheme

While Sole Traders and Landlords are not required to participate in the Making Tax Digital initiative until April 2023, it is possible to voluntarily opt into the pilot programme provided certain criteria are met.

Participation in the pilot programme will provide the ability to submit taxes to HMRC digitally rather than sending the self-assessment forms. The pilot programme will eventually incorporate the real time system that will allow taxpayers to keep track of their tax obligation as they go.

Benefits of Making Tax Digital

By automating the process of collecting financial information and submitting reports directly to the HMRC the number of errors, and concerns about audits or unexpected tax obligations will be reduced or eliminated. When the system is fully integrated, and the bugs are worked out much of the current effort and time spent collecting or searching for financial documents, interpreting tax law, and calculating tax payments will be spent developing the business, bonding with customers, or vacationing with family instead. Those tasks will soon be performed automatically and in real time with individual transactions or at the close of business when the daily receipts are balanced.

This real time reporting and cumulative tax burden calculating will allow the tax payer to better anticipate and budget for their tax obligation at the end of the year.