The Making Tax Digital scheme changed the way that tax revenue is collected by the Government.
The ultimate aims of Making Tax Digital were to make it easier and quicker to collect taxes, and to provide taxpayers with a more streamlined and efficient taxation system. Today, the current Making Tax Digital regulations mean that VAT taxpayers turning over more than £85,000 per year must use designated software that integrates properly with the HMRC system. This change has effectively made VAT calculation and submission an online activity, not a manual one.
Interestingly, the UK isn’t the first country to make this kind of change. In fact, we’re part of a global shift towards digital finance. Countries such as Brazil, Portugal and Spain already have several online tax collection and reporting requirements and more countries will no doubt follow suit.
What does Making Tax Digital mean?
The main change from the previous system to the current one lies in the mode of return filing that you’re allowed to use. Under the previous system, there were many possible ways that a business could file a VAT tax return. They could be filed on paper, for example, while they could also be returned online using data from a spreadsheet. Now, they need to be filed from a computerised financial software package that has API functions that allow it to communicate directly to HMRC without the potential for errors to creep in.
How have the Making Tax Digital regulations made a difference?
There is no doubt that Making Tax Digital has brought greater efficiency. Data from external sources such as banks, building societies and other Government departments is fed directly to HMRC, reducing paperwork and record keeping for businesses. No manual processing of information means fewer mistakes and less work all round.
For now, the Making Tax Digital system only affects VAT-registered businesses that exceed the £85,000 threshold, but it is expected to eventually be mandatory for all businesses. That’s good news for these reasons:
• All your business tax data is in one place which means there is only one single version of the truth. At the very least when you come to check the information you know that you have all the details at hand. And keeping all tax data centrally will certainly help to improve efficiency for your finance team too.
• Making Tax Digital not only clarifies your tax position, it can also smooth cash flow and provide more opportunities to lower the business’ bill through tax planning, such as reinvesting back into the business. Being able to utilise this kind of data in a timely manner is an important part of the mix.
• Making Tax Digital compliant technology makes auditing simpler and easier. Pieces of paper can get lost, and simple spreadsheet files can get deleted or corrupted. Using Making Tax Digital-compliant software or integrated, smart spreadsheets is a great way to be certain that you’ll always have the items you need when you need to present them to an auditor.
• Holistic data overviews mean that stakeholders can view the VAT liability at a glance. And the semi-automated functions of many accountancy packages mean that the process of filling out the tax return can be completed much faster and without errors. This in turn means that the finance team have much more time available to focus on other activities.
Although HMRC first introduced the Making Tax Digital rules for VAT filing in 2019, they don’t yet apply universally (even though the longer term plan is to include all businesses). But do be aware of the common misconception that Making Tax Digital only applies to private companies – it doesn’t. For example it also applies to some organisational structures that provide health and social care services such as public bodies and charities. To be on the safe side, it is far better to check exactly what the current rules are and what the impact is on your organisation.
Next steps for Making Tax Digital
Making Tax Digital has proved to be a catalyst for positive change, prompting businesses to gain greater control over their information and invest in digital finance tools. From a VAT perspective, it is much quicker and easier to file each quarter because all the relevant information is already stored digitally. Gone are the days when the finance team had to spend hours tracking down missing information or carrying out repetitive data entry processes. Not only has the time to complete VAT returns significantly reduced; greater efficiency has been achieved too.
Remember this is just the beginning. So, whilst Making Tax Digital only affects VAT taxpayers at the moment, the long-term goal is for all taxpayers to come under a digital system at some stage. Income taxpayers, for example, may have to start using designated and integrated software packages at some future point; the same goes for corporation taxpayers.
Ultimately, Making Tax Digital regulations will only widen their impact, so it makes sense to get ahead of the curve now.
For more detailed information on Making Tax Digital, visit the Access MTD resources hub.