Update 1 May 2018
HMRC have announced an indefinite postponement of Making Tax Digital for the planned changes in 2020 which affects individuals who are not VAT registered.
If you are VAT registered then Making Tax Digital will still go ahead for you from April 2019. Read on to find out how you will be affected if you are VAT registered.
The information contained in this blog is correct as of April 2018 and is based on guidance issued by my governing institute, the ICAEW. The ICAEW are an unbiased organisation whose objective is to regulate Chartered Accountants and will no doubt be working alongside HMRC to set up the new regulations, not to sell their own products.
It’s recently been bought to my attention that certain organisations are twisting the truth about the forthcoming tax changes of Making Tax Digital to push the sale of their own products, regardless of suitability. This really disappoints me so I have put together this blog to:
- Tell you what Making Tax Digital is;
- Explain what Making Tax Digital means for the Self Employed;
- Give you enough information to make an informed decision on how you carry out your bookkeeping & tax calculations now and once Making Tax Digital is officially rolled out.
The impact of Making Tax Digital on Limited Companies and Landlords are slightly different.
What is Making Tax Digital
Making Tax Digital is one of the biggest ever shakes ups to affect the UK Tax System and it affects everyone who pays tax in someway, from Limited Companies to individuals on PAYE. Here I only consider the self employed however.
Making Tax Digital will require self employed individuals to maintain their bookkeeping electronically and report on their income & expenses digitally to HMRC on a quarterly basis. Making Tax Digital promises to make it easier for the self employed to stay on top of their taxes and signals the end of the annual tax return due by 31 January each year.
Unfortunately with a super quick roll out, the details currently being offered about Making Tax Digital to accountants is somewhat sketchy, so we all need to keep on top of the latest information being released by HMRC to fully understand how the reporting process will work.
Why is Making Tax Digital Happening
HMRC has estimates that errors and mistakes results in over £9 billion lost taxes annually, a loss they feel they can hugely reduce by making people switch from manual bookkeeping to full digital bookkeeping.
When Does Making Tax Digital Start
If you are self employed, here are the two key roll out dates you need to be aware of, which will help you determine when you are affected:
- April 2019: all VAT reporting by all VAT registered businesses with turnover above the VAT threshold will be via the Making Tax Digital process;
- April 2020, at the earliest: Everyone else who pays taxes such as landlords, self employed and other non VAT registered businesses will need to report to HMRC under the Making Tax Digital guidelines.
The initial roll out in April 2019 for VAT is intended to act as test of the system before a complete digital reporting system is rolled out, which is estimated to be (but not confirmed) from April 2020.
What Do the Self Employed Need to Report on to HMRC
If you are not VAT Registered, then according to guidance available businesses below the VAT threshold (currently £85,000) will need to report on 3 lines to HMRC each quarter:
At the end of the fourth quarter you will have reported a full years profits but if you need to make year end adjustments that you need to work with your accountant on, for example to claim reliefs and allowances then a final update can be sent to HMRC to bring your figures in line. Alternatively your fourth quarter return can be your final return to close off your tax year.
It does still remain unclear on the exact mechanism for reporting these figures, as well as which approved softwares you can use, but HMRC should be letting us know which are compliant at some point.
Making Tax Digital and VAT
If you are VAT registered and set to be included in the April 2019 Making Tax Digital roll out, then you must start submitting your VAT returns to HMRC using compatible software, not by entering your figures by logging into your HMRC Business Account. The exact approved softwares and detailed requirements on this again remain unclear at the moment.
What You Need to Consider
If you are self employed, there are three things you now should start to think about when it comes to Making Tax Digital:
- Your staging date for Making Tax Digital (April 2019 if you are VAT registered, April 2020 if you are not)
- How to Maintain Your Books Digitally
- How You Will Report Quarterly to HMRC
Note – if you are self employed with more than one business, you will need to report separately for each business. For example if you are a freelancer and a landlord, then you will need to report income for both forms of income separately.
Maintaining Your Books Digitally for Making Tax Digital
HMRC has estimated that errors and mistakes results in over £9 billion lost taxes annually, which they feel will be hugely reduced if books were maintained digitally.
So if you are using a manual method for maintaining your books or still shoving your receipts into a shoebox to hand over to your accountant once a year, then you stand to be affected by the changes that are coming.
Digital Record Keeping means you will need to enter every business transaction onto a piece of software for example listing out all the invoices you send out in a list rather than adding them together manually and recording it as a single figure. This means using a bookkeeping spreadsheet or a spreadsheet.
You can still keep paper copies of all your records or choose to scan copies in (that part of business record keeping seems to remain unaffected).
Spreadsheets will NOT be Illegal
Spreadsheets have been the subject of much discussion when it has come to Making Tax Digital, with HMRC initially rejecting their use but then, after much pressure, making a u turn and accepting their use. What remains sketchy is how the information contained in the spreadsheet will be transmitted to HMRC each quarter, but with the acceptance of spreadsheets we would hope a solution will be found.
What Should You Do Now
Don’t panic! The truth about making tax digital is that a complete set of guidelines and unveiling of the reporting system has yet to happen, as well as clarity on exactly what and how information will be transmitted. This makes it really difficult for me to recommend a permanent solution to you.
If you are not currently VAT registered and using a bookkeeping spreadsheet that you are happy with, then stay with it for now. Wait for the April 2019 roll out to happen, then decide what solution is best.
If you are VAT registered and using a manual system, then switching to bookkeeping softwares will probably make your life much easier. But HMRC has yet to send out a list of approved softwares, so you may prefer to wait to make the switch to make your transition to digital record keeping as smooth as possible.
The Biased Bit…
I recommend getting into a good habit with your bookkeeping from now, so if you are not currently keeping any records on an ongoing basis, then now may be a good time to start getting yourself into a good routine. This will make the Making Tax Digital changes easier to deal with and understand once they are enforced.
These are my top tips to start getting your bookkeeping organised:
- Open a business bank account, if you do not already have one
- Setting up a bookkeeping system which you maintain on a regular basis
- Maintain a system for filing and storing your business records.
Spreadsheets are much more intuitive and avoids non accountants learning about double entry bookkeeping. I’ve designed ready to use bookkeeping spreadsheets specifically for Self Employed Individuals who are not VAT registered. It’s a complete bookkeeping system including details on how to file & store your business records, all at a one off low fee. It’s a great fix to get your bookkeeping organised while we wait for me information and there’s even free support from me to help get you set up!