Mistaking Tax Digital: 13 myths busted
Since the Making Tax Digital (MTD) consultation response came out in January, HMRC has provided very little in the way of additional clarity or information. Inevitably, this has led to rumours about the initiative spreading thick and fast. But don’t worry, we’re here to shed some light on the situation and clear up some of the myths that you’re likely to have heard.
Below we tackle 13 of the most prevalent MTD rumours and separate fact from fiction.
Myth 1. Making Tax Digital has been postponed
Making Tax Digital, along with another 71 clauses, was taken out of the Finance Bill in April, but the original timescale hasn’t been delayed. With the pilot of the initiative well underway and many of the UK’s top tech companies, including FreeAgent, continuing to work closely with HMRC to flesh out the plan, we're assuming that the government is sticking to the roadmap so that we can make sure small businesses have enough time to get ready:
July - December 2017
Digital tax accounts show taxpayers an overview of their liabilities in one place.
Businesses, self-employed people and landlords with turnover above the VAT registration threshold start updating HMRC quarterly for Income Tax and National Insurance obligations through accounting software.
Businesses with a turnover between the minimum threshold of £10,000 and the VAT threshold start updating HMRC quarterly for Income Tax and National Insurance obligations through their accounting software.
MTD starts for VAT figures and returns.
Most businesses can start updating HMRC quarterly for Corporation Tax obligations through their accounting software.
The full range of HMRC services is available through digital tax accounts.
With the next Finance Bill due in the autumn, we could still see MTD set in legislation by the end of the year. This will, of course, depend on the outcome of the general election in June.
Myth 2. Under MTD I’ll have to submit quarterly tax returns
The press have called MTD a "quarterly tax return" but that's not really the case. Reporting your business’s financial data to HMRC throughout the year will replace the annual tax return but isn’t likely to be the same process, especially if you don’t currently use accounting software.
Updating HMRC quarterly with accounting software
With all your business accounts kept up to date in accounting software and with a lot of the admin automated, submitting your financial data to HMRC throughout the year should really be as simple as checking it over, filling in any missing information and hitting a button to send. If you’ve ever used FreeAgent to submit your Self Assessment tax return directly to HMRC, you’ll know how simple this process can be.
So when will I have to report to HMRC?
Based on information from the draft MTD clause in the recent Finance Bill, which we could well see in the next Finance Bill, here’s a rough outline of when you might have to submit updates:
|May, Jun, Jul 2018 (Quarter 1)||31 Aug 2018|
|Aug, Sept, Oct 2018 (Quarter 2)||30 Nov 2018|
|Nov, Dec, Jan 2018/19 (Quarter 3)||28 Feb 2019|
|Feb, Mar, Apr 2019 (Quarter 4)||31 May 2019|
|End of Period 2018/19||31 Jan 2020|
|Final Declaration||31 Jan 2021|
*Table adapted from AccountingWEB
The table shows that self-employed taxpayers will eventually have to make six submissions to HMRC every year – but if you’re imagining that you’ll be raking around in a shoebox full of receipts or tearing your hair out trying to get your spreadsheet to work, the good news is that accounting software (like FreeAgent) will make the whole process a lot quicker and easier.
Mwahahaha...tax return, smax return - done & dusted with @freeagent in 8 mins flat...plenty of time left to cry into my beer how much owed— James Simmonds (@followjimbobdog) January 31, 2017
Myth 3. Making Tax Digital is hugely unpopular
Despite the heated commentary on a few tax forums and social media groups, the evidence points to people feeling largely pretty positive about the prospect of a new digital tax system. In our recent survey of micro-business owners who have already digitised their bookkeeping, nearly half of the respondents said they felt positively about MTD, compared with just 11% who felt negatively:
How do you feel about Making Tax Digital - the UK government's plan to digitise tax by 2020?
|I feel positive about it||41%|
|I don't know what Making Tax Digital is||20%|
|I'm not sure||15%|
|I don't have any opinion either way||13%|
|I feel negatively about it||11%|
*From FreeAgent’s 2017 Business Monitor survey of 701 microbusiness owners.
Although the general mood is largely optimistic, elsewhere in the survey 84% of respondents felt that the government has not provided enough information about its plans for Making Tax Digital and just 4% felt that they’d had enough information about how it will affect their business. If you’re among the majority on this one, you can find out more about how MTD will impact you and your business in our free guide.
Myth 4. HMRC will be snooping on all my financial data in real time
The use of the phrase ‘real time’ to describe financial reporting under MTD is a little bit confusing. HMRC has said that it will process financial data in ‘as close to real time as possible’ but realistically, figures will only be accurate as and when you submit them to HMRC - which will be at least quarterly (see the table in myth number 2 above).
The collecting and processing of data in this way is intended to give taxpayers more certainty of their tax bill and an ongoing picture of their tax position throughout the year. There has been talk about a ‘pay-as-you-go’ system for MTD, where you’ll be able to make payments towards your tax bill as and when you submit updates, although how this might work in practice is still in discussion.
HMRC claims that the new system of real-time tax reporting will also improve the quality of record keeping and reduce the £6.5billion which is currently lost through errors.
Myth 5. A digital tax system will be far too technical for most people
It seems that the proponents of this myth greatly underestimate the digital savvy of UK taxpayers. Millions of businesses already manage tax online with 99% of VAT returns, 98% of Corporation Tax returns and 86% of Self Assessment returns currently submitted online.
Even if you’re one of the 14% who don’t submit their Self Assessment tax returns online, HMRC has promised prompts, advice and support throughout that will make interacting with your digital tax account as simple as possible. Webchat is already available via your digital tax account so you can chat to HMRC at a time that suits you and hopefully never have to listen to that wretched hold music on deadline day ever again!
Myth 6. Digital record keeping is going to be a huge hassle
In FreeAgent’s 2017 Business Monitor survey, customers reported that switching to our accounting software saved them a day a month on average, compared to their previous bookkeeping method. In the same survey, nine out of ten FreeAgent customers also said that using FreeAgent makes them feel more relaxed about managing their business finances.
It might take a little bit of time to get used to new software but when you do you’ll reap the rewards. FreeAgent currently enables sole traders and limited company directors to fill and file their Self Assessment tax return directly to HMRC from the software. Up to 90% of the self-employment form for sole traders is automatically filled as they go about their daily business.
Being able to see your tax liabilities build up over time in FreeAgent’s Tax Timeline prevents any nasty last-minute surprises, while many of the other time-consuming parts of daily business admin, such as chasing unpaid invoices, are automated. Watch the video below to see how digital record keeping in FreeAgent can currently help you file your Self Assessment tax return with ease:
Myth 7. My spreadsheet is just as good as any digital tax software
Spreadsheets are great for some tasks, but have you ever given accounting software a go to compare the two methods? You’ll soon find that a powerful accounting system goes way beyond anything that even the most complex spreadsheet can manage.
Your spreadsheet could also be feeding you false information. According to MarketWatch, 88% of spreadsheets contain errors and there are plenty of spreadsheet horror stories from big companies that will be likely to cause concern. With the accuracy of financial figures the cornerstone of any good business plan, do you really want to be taking risks?
Myth 8. I can opt to do paper returns instead
As the government strives towards providing a modern digital experience for taxpayers, it’s unclear whether the paper tax return will survive in any shape or form. In HMRC’s words: “The appetite for digital services is strong, and relying on a predominantly paper-based tax system makes no sense in the 21st century”. Statements such as this have paper tax returns across the UK quaking in their boots!
Without confirmation about alternatives for those exempt from MTD, we might yet see a tiny minority still able to file paper returns; however, it’s looking increasingly likely that it’s the end of the line for pen and paper.
Myth 9. People who are not good with computers are being discriminated against
This is an important issue and it’s one that HMRC has considered; it has published a list of those who will be exempt from the initiative, including those who genuinely cannot use digital tools “for any reason”. HMRC has also suggested that people who “genuinely cannot use digital tools” will be able to nominate someone to update their accounts for them or give information to HMRC by phone.
Myth 10. I don’t have to do anything about this for a long time
Assuming that the above timetable doesn’t change in any way, businesses with turnover above the VAT threshold of £85,000 will have to start keeping their records digitally as soon as April 2018.
For businesses with turnover under the VAT threshold and above the £10,000 threshold, MTD will start the following year. That’s just two more Self Assessment deadline days before you’ll need to have an accounting software solution in place.
Myth 11. HMRC will provide free software that I can use
HMRC has confirmed that it will not be providing software directly. However, it “will ensure that free apps and software products are available, but many businesses and their advisers will choose to use commercially-available tax software packages”. This really means that the onus is on you to find a digital accounting solution that works for your business. With little time left before you need to start keeping digital records, it’s certainly not too early to start looking.
Myth 12. Making Tax Digital means I’ll need to keep extra records
As the goal of Making Tax Digital is to simplify the UK’s tax system for everyone involved, businesses will not need to keep any more records than they do already. HMRC has confirmed this, adding that the digitisation of business's records will “contribute to our target to reduce business burdens by £400m”. With this goal in mind, forcing businesses to keep extra records would be counterproductive.
Myth 13. Switching to digital accounting is going to be incredibly stressful
We know it’s stressful to have to make a change – even when you know it will save you time in the long run. At FreeAgent we know that a lot of our customers feel that managing their business accounts using our software saves a lot of stress, especially when it comes to tax:
How did I freelance for 10 yrs without @freeagent? Book-keeping a breeze, auto invoice chasing and my support email answered in 32 minutes— Tom Albrighton (@tomcopy) January 12, 2017
Find out more about how the new era of digital tax will impact you in your free guide to Making Tax Digital.
If you're an accountant, we've created a handy version for you to share with your small business clients.