How prepared are small businesses for Making Tax Digital?

 In Small Businesses & Startups

With HMRC’s Making Tax Digital (MTD) consultation period coming to an end, small businesses are soon to find out exactly how the transitionary process might work.

The initiative will require small businesses to submit their tax returns online. The current annual tax return will be replaced by quarterly reporting.

However, the scheme has come under criticism, with commentators stating that Making Tax Digital will make the process costlier for small business owners in terms of both time and overhead costs.

What challenges does MTD raise for small business owners and HMRC?

According to the Institute of Chartered Accountants in England and Wales (ICAEW), only 25% of small businesses currently maintain online tax records.

This places significant pressure on small business owners, HMRC and software providers to get the remaining 75% online in time for the switchover deadline.

The ICAEW report also raises concerns over ‘digital exclusion’; the exclusion of specific small businesses from digitising tax records due to a lack of funds, specific technical knowledge or relevant digital infrastructure.

In terms of increased expenditure caused by Making Tax Digital, the Federation of Small Businesses (FSB) estimates that small business owners will be required to pay an additional £2,770 per annum in compliance costs.

Based on these points, the ICAEW report has concluded: “total compliance is impossible… We believe the move to digital should not be made compulsory and instead should be a matter of choice for business owners.”

Depending on the outcome of HMRC’s consultation, such feedback from leading national bodies raises the possibility that MTD could be phased in incrementally at first, in order to give small business owners sufficient time to adapt.

David Lyford-Smith, ICAEW technical manager, speculated on alternative options, stating: “There must be an avenue for those who cannot comply with digital reporting to avoid penalties; this may be through traditional paper-based record-keeping or via supporting a network of accessible and affordable tax agents.”

How can small business owners prepare for Making Tax Digital?

HMRC aren’t known for the smooth implementation of new processes  especially ones based on digital platforms.

But, there are plenty of cost-effective options out there to help small business owners bring their financial records online ahead of the switchover.

Advanced accounting software providers Xero have already made digital submission of tax returns easier for small business owners.

By synchronising financial records with one of these systems and a specialist small business accountant, small business owners can save valuable time on data input, gain a real-time overview of business finances and streamline the tax return submission process.

Both options provide small business owners with an advanced tax timeline, which notifies them of tax forecasts and upcoming submission deadlines. Xero will also log small business financial activity in real-time, enabling business owners to access a tax forecast at any time.

Small business owners who choose to digitise their tax records ahead of the official switchover will find it easier to meet mandatory reporting standards, and can start saving time on tax return calculation and submission straight away.

Call on 3 Wise Bears to help your small business with the MTD switchover.

 

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