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Home » Tax » Why businesses will have to ‘go digital’ when paying their tax

Damon Anderson

Director of Partner & Product, Xero

VAT-registered businesses will have to file their returns using HMRC compatible software from April. It’s part of the government’s Making Tax Digital initiative — and, soon, it’s going to affect everyone.

Are you ready for the biggest ever shake-up of the UK tax system that’s just around the corner?

From April of this year – by law – you’ll be required to go digital and file your VAT returns using HMRC-compatible software. This initiative is called Making Tax Digital (MTD) and, according to the government, will “make it easier for individuals and businesses to get their tax right and keep on top of their affairs.”

A third of businesses aren’t ready to go digital

The problem is, some businesses seem to have been caught on the hop. Last October, a survey carried out by Xero found that despite fewer than half of accountants being prepared for the change, almost one third (30%) of those surveyed said they expect digital tax to increase their firm’s productivity, with 51% admitting that online software is already improving collaboration with clients, as well as increasing speed (46%) and reducing the amount of errors to fix (28%). 

“If you can use Facebook
or Twitter, you’ll be able
to use this!”

When it comes to small business owners, one quarter (25%) admitted they are completely unaware of the upcoming legislation. In short: if you’ve never heard of MTD, you need to get on top of it. Now.

“The idea behind Making Tax Digital is to create the world’s most digitally-advanced tax system,” says Damon Anderson, Director of Partner and Product at Xero, a company that offers a cloud-based accounting software platform for small businesses. “What MTD does is mandate businesses to use software to electronically file their returns. 

“Gone will be the days of maintaining records on paper and, at best, plugging data into the HMRC portal. Instead, people will use HMRC compatible software that offers a beautiful customer experience and makes filing returns seamless and efficient.”

Finding the right software for your business

SMEs below the VAT-registered threshold can’t afford to ignore Making Tax Digital either as, sooner or later, these changes will affect every business (including sole traders) paying income or corporation tax. However, this hasn’t been mandated yet and will only commence from April 2020 at the very earliest. So watch this space.

If all of this sounds worrying, Anderson says it needn’t be. The first thing small businesses need to do is consult the HMRC website to find out which providers offer HMRC-compatible software. The good news is that SMEs might already be using HMRC-compliant software for other business applications; in which case there may be no additional cost from their provider when it comes to filing returns.

Synchronising data between businesses and bank accounts

“For the approximately 400,000 businesses in the UK that aren’t already using HMRC approved software, they’ll need to find it and, typically, they’ll have to pay for it,” says Anderson. “But the big plus is that all their tax information will be easily captured and synced with their bank accounts, which makes it simple to file returns.”

Benefits for businesses and their accountants

The more financial data a business plugs into the software, the more benefits they’ll reap. For instance, they’ll be able to gauge their profitability and see trends and cash-flow at a glance, using the data to inform their decisions and grow their business. 

MTD also offers efficiencies for accountants who have SME clients. “One software platform will give accountants greater visibility across their entire client base,” says Anderson. “It will also save them time, because they won’t have to manually filter through a client’s paperwork anymore.”

The set-up process is easy, too. “You simply go onto a provider’s website, sign up and you can be ‘live’ within minutes,” says Anderson. “Free trials are also available. It’s all based in the cloud which is a big plus for businesses because they don’t have to think about server rooms or IT contracts.”It’s also easy to use. “If you can use Facebook or Twitter,” says Anderson, “you’ll be able to use this.”

Digitalising tax will be a game-changer 

Making Tax Digital is only the beginning of the digital transformation journey for SMEs. “HMRC has been struggling to get access to business data, while businesses have been struggling to keep it effectively,” says Anderson. “Now there is a huge opportunity to help businesses move away from the old, manual process. Yes, there’s always a fear of change. But when customers try MTD, they realise how easy it is — and that it’s a game changer for their business.”

Visit Xero’s Making Tax Digital hub for more information on how to prepare for the new legislation.

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