Why Go Digital? HMRC’s Reasons for Making Tax Digital
It’s taking years to debate, much less implement. It’s got the small business community in a lather as everyone tries to figure out what it means for them. And depending on who you listen to, it’s either going to make filing your tax as easy as pressing a few buttons, or it’s going to require you to file miles of data five times a year. Making Tax Digital (MTD) has certainly got small business owners talking … and many are asking, why go digital at all? What’s the point of implementing MTD? And what is HMRC getting out of it?
In a nutshell, it’s an attempt to make the whole tax experience better for both SMEs and HMRC.
When it comes down to it, HMRC is backing MTD in hopes of make doing taxes easier for small businesses while minimising the risk of not collecting tax. Under those umbrella goals, there are a number of other reasons HMRC is embracing MTD, including:
MTD will allow tax payers to see all their information in one place.
Right now, you often have to look at a bunch of different accounts or in several different places to get a good sense of your tax obligations. MTD is designed to make the experience of keeping up with your taxes more like digital banking, where you can see all of your information instantly in one place.
MTD will cut down on having to repeat information to different branches of HMRC.
No one enjoys the experience of calling up to get an answer to a question that seems like it should be easy to answer, only to get bounced around to different departments and have to repeat the same information over and over again. Similarly, it’s frustrating — not to mention a waste of time — to have to file the same information or form over and over again because you have a complex tax situation. Under MTD, you’ll file your information only once, and be able to contact HMRC digitally if you have any questions or need clarification on anything.
MTD will allow small business to see their tax obligations throughout the year.
One of the most talked-about parts of MTD is the real time tax component. As things stand now, you only find out exactly how much you’re going to have to pay HMRC after you file your annual tax return. While you can make some informed guesses throughout the year, there’s no way to really know how things are going to play out, so you might find yourself with an unexpectedly large tax bill.
But once MTD comes into play, you’ll update your financial information in the MTD interface at least four times a year. Each time you do this, the MTD interface will calculate your tax obligations as they stand at that time, so you can get a sense of how things are shaping up throughout the year. This will not only help you avoid getting shocked by a high tax bill at the end of the year, it will also make it much easier to create accurate quarterly and annual projections for your business budget.
MTD is simply a continuation of the ongoing trend of digitalisation in business.
One concern that’s often aired about MTD is that it will force everyone to do their taxes digitally. While this is actually untrue — HMRC has created alternatives for those who are genuinely unable to use the new digital interface — it also doesn’t really matter, because it’s not that big of a step from where we are now.
While the majority of UK small businesses will have to make some kind of change to their accounting system to be ready for MTD, many businesses are already doing at least some of their business financial management digitally. According to HMRC’s numbers, 99% of VAT returns are done online, 98% of Corporation Tax and 86% of Self-Assessment returns are done online, so using the MTD interface to quickly upload data throughout the year won’t be that much of a leap. In fact, it might be easier than the way things are now, since small business owners won’t have to sort through a lot of paper data to figure out what to put into the tax forms.
MTD will help HMRC collect the billions of pounds of taxes that are currently slipping through the cracks.
While most small business owners do their best with their tax returns, errors do inevitably happen. And while a few pounds here or there might not seem like much, things have gotten to the point where over £8 billion a year remains uncollected. This translates into a serious funding deficit for important services. Plus, the uncertainty of the current system greatly increases the potential for well-meaning business owners to make mistakes that get them audited by HMRC, which is a frustrating process for all involved.
Like any big change, MTD is taking time and making waves — but in the end, it’s designed to benefit many of the very people who are resisting it.
Did you know you can use a free online accounting spreadsheet to manage MTD? Help your small business comply by getting started today