As you’re probably aware if you’re involved in the running of an SME, the way that we all record and report our taxes is currently undergoing a momentous change. Making Tax Digital (MTD) is the government’s flagship scheme to make the UK’s tax regime fully digital. It requires businesses and individuals to keep digital records and make regular tax submissions using MTD-compatible software.
HMRC says that it will ultimately make the regime more effective, more efficient and simpler to use for taxpayers. It stated, in fact, that in a recent independent study of more than 2,000 businesses, more than two-thirds (69%) said that they had already experienced at least one benefit from MTD.
It does require some changes though and businesses and individuals need to get to grips with them sooner rather than later. The first part of a staged rollout was MTD for VAT, which was introduced for businesses above the VAT threshold (a turnover of £85,000-plus) and was extended to include all VAT-registered businesses from April this year.
Keeping accurate records is a vital part of running a business, of course, and many businesses were already using specialist software to keep track of different aspects of their finances even before MTD came into view. This is generally a smart move for sole traders, microbusinesses and small businesses alike, as it brings a number of benefits. From creating smarter invoices to controlling your cashflow, tracking expenses, payments, wages, and more, digital accounting makes a lot of sense.
VAT is one aspect of finances that can be tricky to get to grips with for many sole traders and smaller businesses. Using VAT return software can help simplify the whole process, whether you’re selecting the right VAT rate for your business and how often to apply it, keeping a digital paper trail to integrate with your wider banking and accounting processes, running reports or submitting your returns to HMRC.
The simplest way of interacting with HMRC in relation to your VAT and other tax affairs is to use fully MTD-compatible software, and there are plenty of suitable software packages to choose from. These will allow you to keep records via the dedicated software, but many businesses have historically used other methods – particularly in the form of spreadsheets. Despite their widespread usage, spreadsheets are not compatible with MTD. They require additional software, known as bridging software, to ‘translate’ the data kept in the spreadsheets and make it compliant with MTD.
According to HMRC, there are no plans to eventually force businesses to abandon their spreadsheet systems for digital recordkeeping and tax calculations, as long as they are used in conjunction with bridging software. You will need this sort of bridging software to use as a link if you continue to use spreadsheets or other MTD-incompatible software, but dedicated MTD software might still prove to be a better bet when it comes to accurate reporting and a more efficient end-to-end experience.
