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Making Tax Digital: everything you need to know

Making Tax Digital: everything you need to know
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Making Tax Digital: everything you need to know
Siobhan Stirling - Sharp Minds Communications for Capital Space by Siobhan Stirling - Sharp Minds Communications for Capital Space
Owner/Director - Sharp Minds Communications Ltd

Do you own your own business or are you self-employed? Since 1 April 2019, VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 have been required to use appropriate software that is compatible with HMRC , to digitally record and submit their Self Assessment tax returns. If your business has a turnover under this threshold, the process is voluntary. Making Tax Digital is part of the government’s aims to simplify tax administration and the process of calculating tax correctly, for businesses and the self employed.

You may have already joined Making Tax Digital if you have been using the new service since 1 April, for your first VAT period. However, if you file quarterly, your first VAT returns using the new process will not be due until this August or possibly later. If this is the case for you, there are some details you need to consider before proceeding with signing up for Making Tax Digital and filing your return in time.

Online Accounting Packages

With HMRC’s Making Tax Digital now in effect, you and your business need to familiarise yourself with the various online accounting and bookkeeping software available.  Accountant at Synergee Ltd.  and online accounting and bookkeeping software expert, Steve Bolton, advises, “Most software tends to be capable of more than you will ever need to utilise. You need to decide on what is important for you and then find the relevant product that satisfies you and your business’s individual requirements. What works for one business may not work for the next.”

Questions to ask yourself when choosing an online accounting package 

As a business owner, you will need to consider five things when deciding which software to choose:

  1. Price - The price of the subscription or license and whether the features included in the package justify its cost within your own budget.
  2. Features – some software will incorporate basic accounting features, whereas others will offer a comprehensive service to help with additional areas of your business, such as tracking inventory and managing vendors and orders.
  3. User-friendliness – do you intend to do your own accounts? Do you have experience of bookkeeping software already? Or do you need a basic system that you can learn or pick up via some training?
  4. Do you require the flexibility of multi-currency transactions?
  5. How vital to you is mobile access to your accounts?

Pros and cons of different online accounting packages 

Take a look at some of the pros and cons of the most commonly-used cloud packages for Making Tax Digital:

Arguably one of most popular online accounting software packages for business owners and accountants. It is not only effective for freelancers who want to monitor their self-employed income, but it has the functionality to handle more demanding reporting requests for large businesses, too. Steve suggests: “For new business owners looking to do their own books, I would recommend QuickBooks. All the various software packages do very similar things, but QuickBooks, in my opinion, offers ease of use, reasonable cost, a number of useful add-ins, customisable reporting and monitoring tools.”

“Xero is slightly better geared, functionally, towards larger, multinational businesses,” says Steve. It will track and record invoices, inventory, payroll and expense claims. “Xero is also better at linking to newer online banks and PayPal data than some of its competitors,” he adds. However, the large number of features do come at a price – one usually more affordable for a sizeable business.

This software is great for small businesses and freelancers as it monitors basic accounting and finances and comes at a low cost.

This is more specifically aimed at freelancers and very small businesses. It takes care of simple tasks e.g. invoicing, receipts (which you can upload photos of), expense management and time tracking. FreeAgent also has experience on its side: it has been submitting digital VAT returns to HMRC for years. Note though that it does not offer stock-control functions, something that small businesses often desire.

This software has won over small business owners with its customisation ability. However, it does not currently include a payroll tracking and payment feature.

At the moment, there are 348 recognised software providers for Making Tax Digital, some of which are bespoke to a particular client and have had to be registered. However, you can search for any software on the HMRC website to check whether it is appropriate for you and your needs and compatible with Making Tax Digital for HMRC here  or here .

Once you have decided on your specific package, find out more about the signing up process for your particular business, here .

Do I need training to use the software I choose?

Not necessarily – training will be specific to the software. Steve mentions, “It is also dependent on the level of bookkeeping skills an individual has, and how tech-savvy they are. If you have used a package previously then using a Making Tax Digital package will be very similar, so further training may not be necessary.” He also adds that most accountants and bookkeepers, such as Synergee Ltd. , are currently offering training for packages to help business owners make the transition and record their finances correctly. However, it is also important to note that many packages do come with built-in, helpful support functions.

Do I have to switch from using spreadsheets to exclusively using MTD accounting software?

No, you do not. “HMRC is aware that bookkeeping packages aren’t for everyone,” notes Steve. HMRC has stated that businesses that manage their finances using spreadsheets can still choose to use them to record and calculate taxes. However, these spreadsheets must be functional and link with a form of ‘bridging’ software that is capable of sending VAT return data back to HMRC in a format that avoids the manual re-entry of data. This would then comply with ‘Making Tax Digital’ and be accepted. Steve explains that, “These bridging software tools are usually downloadable programs that either run alongside or as an add-in to Excel.”

There are 155 bridging software tools registered to HMRC, which you can choose from here .

Leniency promised

It is also important to note that as Making Tax Digital is new to business owners, HMRC  recognises that individuals and businesses will require time to familiarise themselves with the new requirements and software. Penalties related to specifically Making Tax Digital, will not be issued within this first year.

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