I run a property business and, given the crazy nature of the past eight months, I’ve neglected to prioritise year-end tax filings. I understand that HM Revenue & Customs’ next phase of Making Tax Digital might compel me to use technology more, for example to link our accounts digitally to underlying ledgers. Until now I have done nothing to modernise how I manage tax filing, so this feels overwhelming. Am I going to need to rethink the way I report my taxes to HMRC?
Ian Bowden, tax partner and head of tax performance engineering at BDO, says technology is influencing everything that we do nowadays, and how we manage our interactions and tax filings via HMRC is part of that.
If you run your property business through a corporate vehicle, then Making Tax Digital (MTD) — the Treasury’s plan to improve the efficiency of tax filing — will change the way you file in due course.
HMRC issued its consultation document on the proposals on November 12 2020, with responses required by March 5 2021. The consultation document sets out its desire for businesses to make more regular submissions as well as an annual tax return.
There will also be a requirement for tax submission calculations to be digitally linked to your underlying ledgers. There will inevitably be a refinement of the more detailed proposals included in the consultation document next year before we see draft legislation in 2022-23.
Forward looking companies are taking their first steps to streamline their use of technology and improve their processes to prepare for this change. Disparate data sources often need to be considered and brought together to manage this effectively. Getting this right will reduce the year-end burden and increase your ability to forecast your cash flow.
Many people are taking the opportunity now to move to a monthly reporting cycle to improve the accuracy of those forecasts. If you do not operate through a corporate vehicle, and your annual business or property income exceeds £10,000 annually, then MTD for income tax will apply to you from April 6 2023.
MTD for income tax will require you to retain your records digitally, and link the outputs from those records through to your tax filings. This may sound complicated, but there are some simple steps that you can take now which will put you in good shape for this change.
First, retain your records in some form of digital ledger system. Keeping your records in a single location makes sense, and you can use a spreadsheet for this if you don’t have an electronic general ledger. Set a logical and simple-to-follow structure and make sure you stick to it.
Second, take a look at the free versions of the MTD for income tax submission software. There are a number available currently and we expect more to be introduced over time. Looking at the type of data that they require and the way you upload your data will help you to start to structure your underlying ledger outputs.
In order to avoid complexities further down the line, it is important to start this process now. Establish a simple set of digital records which will support an upload to one of the “MTD for income tax” software solutions. This will help you be in the right place to ensure you can remain compliant when 2023 arrives. Finally, don’t forget that any expenses you incur in relation to remaining compliant are of course tax deductible.
Alex Lipman, audit and accounts manager at advisory firm Wilson Wright LLP, says you are certainly not alone. Many business owners have understandably been preoccupied since the spring with the day-to-day running of their businesses and have struggled to find time for annual accounting.
While the government has extended various deadlines during the crisis, you still need to meet them in order to avoid the steep penalties that come with late filing and payment.
You will need to submit your 2019-20 personal self-assessment tax return by the online submission deadline of January 31 2021, if you have not already done so.
Likewise, if you manage a limited company, the filing deadline for accounts with Companies House has been extended to 12 months from the company accounting year-end.
The tax return is due on the same date. However, HMRC will still expect any tax payment nine months and one day from the year-end date.
The need to meet these statutory deadlines while also dealing with the impact of the pandemic on your business is causing a lot of anxiety for business owners. But it has become easier as more people have moved to cloud accounting.
There are many user-friendly options on the market, which will work on smartphones, tablets or desktops. Xero, for example, is widely used as a finance function and business tool.
The most obvious benefit of cloud packages is the integration of bank statements, which saves you time on manual entry and enables you to upload digital copies of receipts and invoices. However, the leading products can do much more with the help of add-ons and applications which tailor the software to your business, with benefits such as debtor recovery and inventory management.
To date, we have only seen the introduction of the MTD scheme for VAT, but you are correct that HMRC has earmarked start dates for quarterly digital reporting for other taxes. These are expected from April 2023, with trial periods starting soon.
The idea behind MTD is to make tax submissions more effective, efficient and, importantly, easier for you. It will require you to adopt HMRC-compatible software, which for small and medium sized businesses and sole traders usually means a cloud-based digital accountancy package. I strongly recommend using one of these packages to do the heavy lifting for you.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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