In the year that HMRC’s Making Tax Digital (MTD) initiative has come into effect, we're finally taking the first significant step towards paperless and digital first tax collection. MTD encourages individuals to keep validated digital tax records on their chosen accounting software, with the aim of encouraging business owners to eventually go paperless. It makes tax administration more effective, more efficient and easier for businesses to stay on top of their affairs.
What are the problems associated with outdated accounting software and manual processes?
Usually, end users will have to log into various online banking applications and download individual statements for given time periods, then upload them into the accounting software. In some cases users have to convert files to match upload requirements, or there are additional manual inputs which can also be prone to human error. These manual processes lead to a regular and unavoidable time investment for tax submissions or reconciliation.
What can accounting software providers do to support SMEs?
Accounting software providers now have the power to reduce the amount of time that businesses and self-employed individuals spend processing information manually. Open Banking powered software can streamline processes for SMEs and the self-employed by providing real time feeds directly from the users bank accounts. In practice, this would unlock real-time visibility across all accounts in one accounting application; therefore reducing time spent on reconciliation and cash flow management.
Giving users the option to link multiple bank accounts and share transaction data through Open Banking, will enable automated accounting processes - speeding up tax returns and enabling users to benefit from actionable insights based on up to date financial data. Intuit Quickbooks and IRIS Kashflow are two of the leading providers already utilising Open Banking in their platforms.
Click here to read more about using Open Banking for account aggregation.
The timeline for rollout of MTD is as follows:
Now - VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 need to keep digital records and submit digital VAT returns using compatible software.
From April 2022 - VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax digital rules for their first return.
From April 2023 - Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period.
Since the consultation on MTD for corporation tax, the government will provide businesses with an opportunity to take part in a pilot for Making Tax Digital for Corporation Tax and will not mandate its usage before 2026.
Eventually, MTD will apply to all businesses and self-employed individuals. This move towards digital services powered by Open Banking will eliminate human error, is more convenient and will save time for anyone submitting VAT or tax returns in future.