Donna Torres, director of small business at Xero UK
Tax submission deadlines can be a daunting task. Scrambling together receipts and checking spreadsheets are not how entrepreneurs want to be spending their time. Making Tax Digital for VAT is going to change all of that, for the better.
From April 2019, UK businesses above the £85k VAT threshold will need to process their VAT returns digitally, via MTD for VAT compliant accounting software, such as Xero.
MTD for VAT is part of the government’s wider plan to make it easier for businesses to stay on top of their day-to-day accounts. HMRC is aiming to be one of the most digitally advanced tax administrations in the world, improving: efficiency, effectiveness and ease of compliance. This is a massive step away from paper accounting in Britain.
While in the long run this will be more efficient, businesses will take a while to adapt to the change. By integrating digital record-keeping, business will be able to generate and send updates directly for their software to HMRC and it begins with VAT. Tax will now have to be submitted every three months, and you will get a better understanding of your business thanks to more regular analysis.
Xero estimates that approx. 1.1 million small businesses and thousands of accounting practices in the UK will be impacted, but once the transition is complete, a streamlined VAT returns experience is another step towards fully-digitalised business management.
Preparation needs to begin as soon as possible in order for the scheme to be effective. By planning ahead, the transition in April can be painless for both small businesses and their accountants.
So how do you prepare?
Know the deadline, and don’t get caught out
While digital tax submission is not yet compulsory, the government has set a timeline for when it will be. Only businesses who have turnover about the VAT threshold will need to comply in April 2019, but other businesses below the threshold will have to submit digitally soon after. The smallest businesses will not be required to use the system, but have the option to do so voluntarily. Check out this timeline on the ICAEW website to check when your business will have to digitally submit.
Research your options
Today, only 11% of VAT returns are filed using software. By choosing your accounting software as soon as possible, you can avoid any issues that could arise when it comes time to submit. The use of technology is compulsory. Online accounting software is far easier to use than desktop software, which is not typically able to submit tax online.
Start assessing your online accounting software options now and make sure that the one you choose is easy to use. It should:
- Automatically calculate the tax you owe (including VAT and payroll tax).
- Pull transaction data straight from your bank, your invoicing software, or your POS system.
- Update your transactions every day, allowing you to stay on top of bank reconciliation.
- Create digital records of paper receipts just by photographing them with your mobile phone.
Use your accountant as an advisor
Business owners tend to be more passionate about what their business is selling, rather than compliancy. Our own research shows that for 9 in 10 small business owners, setting up shop is one of the accomplishments they are most proud of, but as a rule they are not keen on all the legislation they need to keep up with.
When it comes to getting ready for MTD for VAT, this where your accountant/bookkeeper/financial advisor can really help. They can advise on how and when to digitise your accounts. They will also know the best software for your specific set of needs and can advise you on how to take advantage of the change in legislation. This is their area of expertise and it is at your disposal, so be sure to mine this resource.
Change can be tricky – even for innovative entrepreneurs. Especially when it involves technology, which can often be put off until the last minute. Don’t panic – MTD for VAT is here to help you. Keeping digital records and filing VAT returns through software quarterly can actually reduce workloads and improve agility. Opportunities can be spotted faster, and so can threats, making reacting quickly a possibility.
It’s now less than 100 days until MTD for VAT. Researching your options should now be a priority. Once your finances are completely digital, your MTD for VAT submission will run a lot smoother. Cloud-based accounting tools can help you automate and auto-correct invoices, reconcile transactions at the click of a button, manage your payroll system on the go and much more.
Visit Xero’s Making Tax Digital Hub for more advice and useful information.
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