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Making Tax Digital and your management accounts

Is Making Tax Digital (MTD) on your agenda yet?  If not, it should be because time is running out before the April 2019 deadline requires businesses to make some fundamental changes to their VAT reporting.

At the moment it’s very simple.  You log on to the Government Gateway and populate the six boxes (or more) from whatever way you choose to keep your accounting records – SAGE, Excel Spreadsheets, Xero, Quickbooks or even just manual paper records.

From next April, this won’t work.  You will need to insert a digital link between your business accounting software and the HMRC VAT return portal.  This digital link is known as an “API” – Application Programming Interface” – and it will enable your business software to communicate directly with HMRC and their electronic systems.

Your existing business records

Many businesses run their management accounts through well-known proprietary software (SAGE, Xero, Quickbooks etc) or other specialised custom software, but if you do, don’t think “OK, problem solved”. MTD is a very misleading title.

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Tax is already digital and much of it has been for many years. This is all about forcing businesses to keep their accounting records or management accounts in an electronic way that enables HMRC to connect with a way that suits them. More of that later.

So what are your accounting records like and what are the hurdles you need to overcome by next April?

1.     SAGE, Xero and the dozens of other accounting software packages – if you use any of them, you should not have a problem.  They have been creating a suitable API for many months and most are ready now.  Check with your individual software supplier that this is the case, but be aware that you will almost certainly need to upgrade to their latest version (selling opportunity – cost implication!).

2.     Specialised custom software – these tend to be industry specific and there is much less chance that they will have automatically created a specific API for what may be a small number of users.  If they haven’t created a suitable API your choice is between switching to entirely new software (at huge disruption) or transferring the key data to a spreadsheet and from there to HMRC (BUT – see below).

3.     The spreadsheet route – many businesses (even some very large ones) already go down this route by bringing together data from various accounts sub-systems to generate consolidated data for their VAT returns.  Small businesses quite often use spreadsheets as their main and only method of maintaining their accounting records.   Initially, HMRC said that businesses would not be allowed to use spreadsheets to make their tax returns, but sense has prevailed and they have now reversed this stance.  The race is now to produce suitable APIs to link spreadsheets to HMRC’s systems and commercial versions have only recently started to appear.

4.     Paper only?  – these are the businesses with the biggest problems.  The big old red, green or blue cashbooks may serve as your accounting records or management accounts but you need to find a way to convert them into a spreadsheet, link up with the API and file electronically with HMRC.  Or bite the bullet and switch to Xero, SAGE etc.

Is there any way of avoiding all this?

Only a few possibilities:

  • If you are below the VAT registration threshold (£85,000) but registered for VAT voluntarily you avoid MTD (for the moment!)
  • Limited exemptions or religious grounds or having no broadband (no clear guidance is available – HMRC deal with them all on a case by case basis).

Be warned – this is only the start

Once all the above has bedded in (how long remains to be seen) HMRC plan to make MTD applicable to those completing self-assessment tax returns and – most importantly – corporation tax returns – both QUARTERLY.  Many believe that HMRC’s not so hidden agenda is two fold:

1.     Flushing out the black economy.  Paper records are hard for HMRC to access without a physical visit from an Inspector.  The digital footprint, however, is far harder to hide.

2.     Faster collection of corporation tax, which is currently payable 9 months after your accounts year end.  How do you fancy paying your corporation tax quarterly, based on your quarterly management account submissions to HRMC?

It’s all coming sooner than you think – now is the time to prepare!

Making tax digital is coming, if you’re not ready then it’s going to be painful for you.  Seek expert assistance to prepare your business for this new requirement from HMRC.

Straight advice on Making Tax Digital and your management accounts

Now you’ve read our article on management accounts – have you any more questions?

Here at Yorkshire Powerhouse, we’re happy to help as much as possible – is there anything else we can do to help you, do you have any further questions or can we help introduce you to an expert – please let us know:

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