Making Tax Digital
What is Making Tax Digital?
Making Tax Digital (MTD) is a radical new system being introduced by HMRC. It will transform the way that tax returns are filed online.
Under MTD, self-employed barristers must keep accounting records electronically and use that information to provide updates on their business profit to HMRC on a quarterly basis.
HMRC’s main aim under the scheme is to make tax administration more efficient and easier for taxpayers through the introduction of a fully digitised system. Also, HMRC estimate that they lose around £8bn a year through filing errors by taxpayers and that MTD will help to reduce those errors.
The way that business profits are reported to HMRC is changing. Barristers with income in excess of the VAT threshold will need to begin digital submissions from April 2018 under the current proposals, and barristers with income below the VAT threshold will need to begin digital submissions with effect from April 2019. Quarterly submissions will be due to HMRC following these start dates, and will need to be based on accurate accounting data. The reports must be submitted one month after the end of the quarter.
That means you will no longer need to wait until the end of the year to find out how much tax you need to pay. However, a penalty regime will apply to late submissions.
If you are not already using software for your business record keeping/accounting you will need to establish a system in order to comply with the rules
What steps can I take now?
- Establish a digital system – use Xero software and Smart Phone App
Steps should be taken now to prepare you for recording and reporting business income and expenditure electronically.
You may want to take advantage of Xero accounting software and the related Smart phone App to begin recording information online. You can record your income and receipts using the same software and can streamline the preparation of VAT Returns
The information can then be collated and reviewed by your accountant prior to each quarterly submission.
The main benefits are:-
- Having a clear picture of your current financial position in real time
- Having a simple system to record expenses by taking photos of receipts and uploading them to the cloud
- Streamlined submission of VAT Returns
- Following best practice for maintaining accurate business records
- If you currently use the cash basis (or would like to)
Under the cash basis, income is taxed when received and expenditure is relieved against tax when paid. It avoids you having to pay tax on the value of the work done until is billed and collected.
From April 2017, the entry threshold for the cash basis increases to £150,000 of income, and the exit threshold will increase to £300,000.
As such, many young barristers will be able to join or remain within the scheme. This will make the reporting of profits under MTD more straightforward and allow individuals to remain within the cash basis scheme for longer.
- Review your accounting year end date – potential to delay your start date for MTD
The regulations may not impose the MTD requirements in respect of any accounting period beginning before the tax year 2018/19. This means that young barristers with an accounting year end of 5th April 2018 will need to start keeping electronic records from 6th April 2018, with the first quarterly report covering the period to 5th July 2018. Young barristers with accounting dates of 30 April 2018 would follow shortly thereafter.
Young barristers with an accounting date ending on 31 March 2018 will not start digital reporting until 1 April 2019, which gives more time to adapt to the new requirements. A further benefit is that the soft landing regime for penalties would not expire until 2020.
There are tax implications to changing your accounting year end, so please discuss this with your accountant, and be sure to address the above 3 points with your tax advisor.
If you have any questions or would like further guidance on the requirements of MTD, please contact Craig Manser ACA of Humphrey & Co. on 01323 730631 or email@example.com