Unfortunately, the tedious tax system that has taken many of us years to understand is now completely changing. You may or may not have heard that the way we calculate and file our taxes in the UK is transforming. Making Tax Digital (MTD) aims to make it a lot easier for individuals and businesses to keep track of their tax - and get it right!
Thinking about all the work you’ve done in the past year every time Christmas rolls around is a nightmare, and compiling that for tax purposes is even worse. Hopefully, this new system will be as easy and efficient for us as it’s said to be for HMRC. I’ll believe it when I see it!
From April 2019, VAT-registered businesses earning above £85k a year will be required to start reporting their tax digitally by keeping digital records using compatible software, although there seems to be some talk whether or not this will be compulsory when it launches. Income tax and corporation tax won’t have to be recorded digitally until April 2020. Here’s what you need to know:
No More Annual Tax Returns
The lengthy and strenuous yearly task of having to recount and remember all of the work you’ve done over the past year is finally coming to an end. “Making Tax Digital is a transformation programme that the government has put in place to digitise and overhaul the small business tax system,” says Makera Kigaraba, Co-Founder of Solna Invoicing.
“Freelancers and Sole traders will ultimately be the biggest beneficiaries of MTD as its number one goal is to make the system more accurate and efficient, and as a result, reduce the amount of tax lost because of avoidable errors,” continues Makera. We can only hope that this new tax system will be a considerable amount better and easier than what we’re used to. “The biggest shift on the horizon is for VAT. If you’re VAT registered you’ll need to make sure you’re using compliant software to make the submissions,” mentions Adam Goodall, Co-founder of Coconut.
Basically, after MTD has come into place, you will digitally send your tax information over to HMRC. This makes recording tax easier as you will provide regular tax updates and routinely pay your tax throughout the year. Sounds good so far.
Keeping Digital Records
This new method of paying and recording tax means that you can be aware of what’s happening with your tax in real time. No more waiting with bated breath until the end of the year to see how much you owe! You will also be able to regularly communicate with HMRC for advice via web chat. In our experience their helpline has been competent when you eventually get through so we’re cautiously optimistic about their live chat option.
“If you’re already using accounting software for this, then you’ll probably be covered already,” says Adam. He continues, “the goal of Making Tax Digital is to encourage people to be more organised with their records, to make their filings easier. HMRC is improving the way they work with software providers to help make the process more seamless.” This is starting to sound promising. Perhaps a digital system will mean fewer mistakes and stress, and be better for all of us.
Exclusion
It is mandatory that those who earn at least £10,000 a year process their tax via the new digital system. However, if you earn below this, you still have the option to use this system if you wish to do so. Sadly, it’s still something we’ll all have to pay attention to (sigh). “There will be some exemptions, but it seems that the majority of freelancers will not fall under these,” says Makera. For example, businesses that are unable to comply with MTD will not be required to use the new digital system. As digital software isn’t super easy for everyone to wrap their heads around, those who have certain disabilities, live in remote locations, and those whose age and religion prevents them from doing so, won’t have to use the new digital tax system.
So it’s best to start to familiarise with this system now. “HMRC have made it clear that they will levy fines to all businesses - even freelancers. Although the initiative currently only affects VAT registered businesses with a turnover exceeding the VAT threshold, it is not long until many sole traders and freelancers will be impacted - as soon as 2019 for those with annual sales between £10,000 and the VAT threshold.” Remarks Makera.
However, if you’re a sole trader, you can kick your feet up (at least for a little bit).“The threat of quarterly tax submissions for sole traders has been staved off for another couple of years, at least, so they’ll be no immediate changes for sole traders,” mentions Adam, “if you’re not VAT registered then you’ve got a while before any changes become mandatory,” he continues.
Software Options
To use the new digital tax system, you must download and install compatible software. Makera advises, “while HMRC will now except Excel spreadsheets that are 'digitally linked,’ freelancers should see the 'soft landing' period as an opportunity to find MTD compatible software and end their over-reliance on word or excel templates.” The best way to get up to speed would be to get in touch with an accountant,” he suggests.
So, when should freelancers start looking at software? “By April 2019,” mentions Anna Guildford who works as a Digital Marketing Assistant at Go Simple Tax. She advises looking at “MTD compatible bookkeeping software such as GoSimpleBooks or look at bridging software such as GoSimpleVAT.”
If you’re wondering what to do in the lead up to this tax change if you aren’t VAT registered with a turnover of over £85,000, Adam advises “splitting your business and personal bank accounts to keep records separate,” and “adopting a bookkeeping solution, such as Coconut.”
So now that we’ve discovered that there’s no need to panic and it will be a little while before most freelancers see the MTD change, it’s still a good idea to prepare, prepare, prepare - we all know how horrible it is when you get caught out by the taxman for silly and avoidable mistakes. Start to look at software options that best suit your business now, get all of your accounts and invoices in order and consider getting an accountant.
To find out more, look on HMRC’s official making tax digital webpage.
