Making tax digital and small businesses

Businesses will be required to transition to digital tax accounts by 2020, with many beginning the process in 2018.

The process, known as making tax digital (MTD) is designed to make the task of managing, reporting and paying tax simpler. It is also hoped that the new system will help close the tax gap which currently stands at over £8 billion a year.

However, there is still uncertainty among SMEs as to what the changes will mean in practice.

In January the chairman of the Treasury committee Andrew Tyrie MP said:

"At present, many of those on whom demands from MTD will be made - millions of small businesses up and down the country: the backbone of the economy - are ill equipped to handle the reporting requirements."

So what do SMEs need to know to be prepared for the changes?

MTD for businesses

The dates from which businesses will be required to manage their tax digitally will depend on the particular tax:

  • April 2018 - income tax and class 4 national insurance contributions 
  • April 2019 - VAT 
  • April 2020 - corporation tax.

Businesses will be required to:

  • use relevant software to keep their tax records 
  • provide summary tax data quarterly to HMRC (for VAT, this will replace the VAT return) 
  • provide a finalised end of year position to HMRC.

The finalised end of year position report will apply 10 months after the fourth quarter of the previous year and will give businesses the opportunity to apply reliefs and allowances.

Unincorporated businesses with a gross income or annual turnover of below £10,000 will be exempt from the process.

The legislative framework surrounding MTD will be introduced in Finance Bill 2017. This legislation will provide further details on the kinds of trading and transactions records that need to be kept and how taxable profit will be established.

Software requirements

The requirement to use software could be a big change for many small businesses. In March 2016 research by the ICAEW found that 75% of businesses were not maintaining their accounts electronically or using accounting software.

Of the construction and manufacturing companies surveyed, 41% were using pen and paper based records.

Those businesses that are unable to access the internet for specific reasons will be excluded from MTD.

Adrian Rudd , chair of the Chartered Institute of Taxation's digitalisation and agent strategy working group, said:

"Just because someone can use a smart phone to make calls and send text messages, does not mean that they will be able to keep accounting records on a smart phone or other digital device. HMRC must not underestimate that many people have difficulty using technology."

The government has stated that it is considering what kind of support it can provide to businesses to help them effectively switch to the new system. In its consultation documents, the government lists potential options as financial support, tax relief or online training.

Contact us to talk about MTD and your business.