We all suffer from accounting problems from time to time. Recent changes to the way businesses file VAT returns are only the start of a huge overhaul to HMRC’s tax filing system. Making Tax Digital could lead to more frequent accounting problems if you don’t get a head of the game.
Making Tax Digital (MTD) is now officially in action: as of 1st April 2019, businesses registered for VAT must now submit their quarterly returns through digital channels. HMRC thinks this may reduce the annual £9 billion cost attached to manual tax return errors.
It’s the start of many changes. Over the next few years, tax returns will become fully digital for all business owners, from sole traders up to multinationals.
However, the changing system poses accounting problems for most businesses. From training staff on new software to changing record-keeping processes, the switch will cause headaches for the unprepared.
5 Accounting Problems Business Owners Face with Making Tax Digital
Many businesses face the same problems with the new filing system. Let’s take a look at the common issues that business owners face with the MTD switchover.
1. The Cost of Switching Accounting Software
Paper VAT returns won’t be accepted by HMRC anymore. In the coming years, Self Assessment, Income Tax, and Corporation Tax returns will also become a fully digitised process.
HMRC aren’t providing software, either. You have to decide on the best accounting software for your unique business needs. The HMRC approved software list will help you to narrow down your choices.
Some accounting software does everything from day-to-day bookkeeping to returns and reports. Other apps create a bridge between your existing accounting software and HMRC.
The type you choose depends on your current and future business needs. Many popular accounting apps and software programs are already on the approved list, but if yours isn’t then it’s time to shop around.
2. New VAT Liability Record-Keeping Requirements
VAT liability record keeping processes need to change to keep up with the new digital quarterly returns.
Your business now needs to keep records of sales with a clear VAT liability breakdown for each transaction. This means you need to record exempt, zero-rated, and standard-rated VAT as part of every transaction record.
Your VAT return will now show a summary of sales broken down by liability type, rather than a single sales figure.
This means your purchases and adjustments for vehicle leasing, import service reverse charges, and business entertainment will also change.
Paper-based record keeping makes individual VAT liability record keeping difficult. Your new accounting software, however, should help to automate the process to reduce some of the additional administrative burden incurred by this change.
3. Access to Digital Technology
Almost 3% of self-employed people in the UK are still ‘digitally excluded’. This means they either have no access to the internet due to rural conditions or don’t have the skills to use it.
HMRC have proposed paper returns may still be available on a case-by-case exemption basis. Exemptions will be the exception and not the rule even for digitally excluded business owners.
Those granted an exemption will eventually need to switch to the new digital records and tax returns system. This means that a digitally excluded business must still start taking steps to digitise records and prepare the switch to digital returns.
4. Training Staff on New Systems
Training your accounts team to use your new software takes time. During this process, the risk of human error and translation mistakes is also high.
Train your staff on the new finance software, and on their role in your company’s MTD obligations, before you need to make the switch. This will reduce the risk of translation errors as data is transferred between your old and new systems.
Remember that digital record keeping affects all staff. For example, expenses receipts need to be filed as digital records. This is easy for online orders but takes some training for paper receipts such as train tickets.
Introduce your new accounting processes to all staff so that they understand their personal responsibilities for keeping digital records.
Consider using a ‘shoebox’ app on business mobiles to help streamline the process. These apps allow users to take photos of paper receipts and automatically send to your accounts team for a digital record.
5. Quarterly Data and Accounts Reconciliation
VAT returns have always been quarterly, but the new burden on your finance team will be in providing more accurate real-time information.
When other tax return types become digital, previously annual returns will also be quarterly.
The increased time burden on your accounts and admin staff should not be underestimated, especially in the first few years of digital accounts reconciliation processes.
The good news here is that accounting software approved by HMRC will help to generate the detailed information needed every quarter.
3 Ways MTD Can Help Small Business Accounting
It’s not an entirely gloomy future in a MTD world. Once you’ve overcome the common problems above, your company will reap the benefits of digital tax returns.
1. Accurate Tax Payments
Quarterly returns will eventually eliminate the need for payments on account and estimated tax payments.
Accurate data used every three months provides an easy way to track your tax obligations without over- or underpaying.
2. Fast Audit Trails
All approved finance software provides greater clarity and added depth of detail for audit trails. Changelogs are a common feature, while human error is easier to avoid – and track.
Overall accounting time will reduce as client and transaction history is easily traceable within one application. Audits will no longer require weeks of preparation: data is easily collated in a short time.
3. Clear Forecasting and Reporting
Quarterly returns mean your business has greater access to clear and accurate financial data.
Forecasts will involve less guesswork as your current figures are now easy to access.
Similarly, reports can be created in just a few clicks, and often adapted depending on the audience. In-depth graphs and detailed data are easy to present to your senior board at short notice, while overviews and summaries for staff help provide a real-time snapshot of business success.
Switching to Digital Tax Filing: Is Your Business Prepared?
If the accounting problems your business faces with the MTD switch seem too big for your small team to handle, don’t panic.
Here at Maple, our team of experts will help guide you through the transition with as much or little support as you need. We can fully manage your bookkeeping and accounts, or provide advice for your in-house finance team to manage the changes.
Contact our Making Tax Digital specialists today to find out how we can make sure you navigate the changes as smoothly as possible.