Making Tax Digital – Challenges and Benefits For Businesses

Making Tax Digital (MTD), a 10-year programme by HMRC to digitise and standardise the tax system in order to make it more accurate, reliable, and efficient for everyone. In other words, it’s a project to simplify and modernise the tax system for all tax-filing professionals and businesses. This is the largest ever transformation to the UK's tax system.

A quick recap of MTD - What it was, what it is now, and to be.

The spring Budget of 2015 announced the first plan. In 2017, digital tax accounts were introduced for individuals and businesses. Later, all businesses exceeding the £85k turnover of VAT threshold have been filing their VAT returns using the accounting software complaint with MTD by HMRC, since April 2019.

Starting April 2022, all VAT-registered companies must comply with the MTD directive of submitting quarterly VAT returns, regardless of annual turnover.

The extension phase of MTD for Income Tax (also known as MTD for income Tax Self-Assessment or MTD for ITSA. This will apply to self-employed landlords and business owners with an annual total income of more than £10,000. It will replace the current process of income tax return filing process of Self-Assessment. MTD for Income tax shall be in effect from April 2024.

While many business leaders have mixed feelings about the changes, most agree that the changes will benefit the Business’s bottom line. As a result, the MTD is a step towards greater productivity and greater data transparency. Moreover, companies can enjoy greater flexibility in developing policies and procedures.

The HMRC is aware of the fact that real-life experiences will vary. Factors that may affect the actual cost of transitioning to MTD include the level of digital engagement in the business, the complexity of the business activity, and the relationship between the business and its tax agent. While no single model can account for all these factors, it provides a general overview of the costs associated with MTD (making tax digital).

MTD will have a major impact on businesses during the next phase. The main challenge was the inability to adapt to new systems and learn new things. Many small businesses found MTD difficult in the early phases. Some businesses will have more difficulty adapting to the new system than others. For example; A tech-savvy business or person will be able to adapt to new technology and software much easier than someone who is less tech-fluent.

This will impact the way that many landlords and businesses manage their tax affairs. Businesses are likely to incur extra expenses when they move to MTD, such as; software subscription, accountant and tax professional fees for advance level of support.

HMRC did revisions to estimated cost and impacts have been published in tax information and impact notes (TIINs). These include the estimation of a business's financial value for time spent choosing software and familiarising themselves with new processes. Each business's experience is unique, making it difficult to estimate the exact administrative costs. However, HMRC The revised estimates provide a better picture of the continuing and transitional costs that different businesses might face.

Nonetheless, every challenge has an opportunity to learn new things and get benefitted from the modern systems.

Reluctance to change the new system and continuing with a spreadsheet, paper and manual bookkeeping doesn't only mean breaking the law but also means spending more time than necessary in the old methods.

Those who are unwilling to use MTD complaint software can use an API to connect non-compliant software like Microsoft Excel with HMRC’s tax systems.  However, in such cases, it will require more effort than those using special MTD-complaint software example QuickBooks, FreeAgent, Xero etc. They are dedicated software for simple and quick bookkeeping of tax records.

So, be it following the old paper and spreadsheet methods or using a software bridging tool, it would mean the involvement of more effort and time without the benefits of MTD software.

In a survey conducted by HMRC in the year 2021, it was reported that businesses who had switched to MTD software experienced more than one benefit, while also experiencing reduced errors in the aspects of statement preparation, bookkeeping, and tax return process.

Let's focus on the other benefits of businesses committing to dedicated MTD software.

Businesses who have committed to dedicated MTD software can get an overview of their financial situation and tax of the year at a glance. But those who have not upgraded will have to manually prepare a report to have an idea of their current situation or only during the tax returns time.

The advanced MTD software keeps information updated and displays them in real-time with all key details on the dashboard which can be viewed from any device with an internet connection. This helps businesses to be aware of what they owe and keep things in place much before the submission of the tax return deadline. It also helps to reduce last moment stress and errors. The inbuilt forecast functionality also helps to avoid any cash flow issues.

MTD has completely replaced the need for manual paperwork with its inbuilt technology which allows you to scan invoices and expense forms and keep a digital record safely in your system. Sifting through piles of papers to find invoices, receipts and other documents is no longer necessary. With all records saved digitally in your system, you don't have to look through mountains of papers to find what you need.

Keeping a record of expenses and calculating tax for tax returns is not only time-consuming but also complicated. It requires a great deal of attention and efficiency. And even if you happen to submit it to HMRC on time, there is no assurance that it was 100% accurate. The last moments are tricky and often involve mistakes. So, if you miss the deadline or make mistakes you will be hit with a penalty. With automated MTD software, it is not just easy and quick but you can avoid mistakes every time.    

With MTD software you can never miss the date of tax returns. It ensures that you are aware of the dates of tax returns to avoid unwelcome penalties. The more informed you are, the better decisions you can make ahead of time.

With the quick automated MTD software, one can save a considerable amount of time which is otherwise spent on laborious manual paperwork. Many tasks which previously took days or hours, can now be completed in a few seconds. For example, VAT returns are generated automatically and can be submitted to HMRC, tax returns and self-assessment liability can be calculated, bank reconciliation has been made simpler, and automated invoices, and payment reminders, can all be done with just a click of a button.

We all know that time is money and this especially holds true for small businesses. So, the less time you spend on account the more time you can spend on your business development.

We have discussed above some of the challenges faced by businesses due to the MTD process and also the benefits which have made businesses function more efficiently.  However, the challenges are a few, the benefits are many which clearly implies that the switch to the modernised MTD step by the HMRC was a needful and welcome change for the businesses. It has made bookkeeping, real-time tax information and automated generation and submission of tax return easy and quick. So, businesses that have still not adopted the MTD must make the switch to reap its benefits.

Make the switch to digital tax now! With Making Tax Digital, you can say goodbye to manual processes, errors, and paper-based systems. Embrace the convenience and accuracy of digital tax reporting and stay ahead of the game. Start taking advantage of the benefits today and join the future of tax compliance. Don't wait, make the change now!

If you are a business looking for a switch from paperwork to MTD software, we are here to help you. At CoreAdviz Accountants, we have expert MTD accountants to help you understand MTD software and simplify the entire process. Just give us a call to discuss how we can make things easy and hassle-free for you in the most seamless way.