Making Tax Digital - Top Tips For Small Business That Want to Avoid Penalties
As a business owner, when you think about Making Tax Digital (MTD), do you instantly think of compliance and avoiding penalties? You’re not alone. But you could be missing a trick.
Chances are, until now, you think about your tax return once a year - at deadline time, when you gather your receipts together and hand them over to your bookkeeper or accountant. However, you’ll know from HMRC’s recent Making Tax Digital announcements, that all this has to change.
Making Tax Digital (MTD) is the government initiative designed to simplify the UK tax system and make it easier and quicker for taxpayers and tax-paying businesses to pay the right amount of tax.
From Tuesday 1st November 2022, by law, VAT-registered businesses will need to use MTD-compatible software to keep and file quarterly VAT records and returns. Failure to do so will result in charges of up to £400. For the self-employed and landlords that are not VAT registered, but have a turnover above £10,000, then your Income Tax returns will need to be MTD compliant by April 2024. Corporation Tax will then become part of the MTD scheme in April 2026.
This means that, according to the schedule above, all businesses will need to:
- File quarterly returns via an accountant,
- Using approved and compliant software,
- With accurate digital records of all tax-related ‘paperwork’, and
- Make digital payments to HMRC.
If you intend to continue trading, then there’s no way round this: it’s time to transition to digital. So here are our 3 top tips for making the transition as painless as possible for small business owners, and for taking the opportunity to get closer to your finances.
1. Shift your mindset and embrace the change
Yes you have to - it’s a regulation. But the MTD initiative is designed to improve the accuracy of accounts submitted to HMRC, which will only benefit your business and, likely, your cash flow too. The fact you have to file VAT quarterly also means you’re going to have a much better handle on your business finances - and you can enjoy all the benefits that come along with that. For example, with your accounts always up to date, things like applying for a business loan (or a mortgage, if you’re self-employed!) are significantly easier.
You might also uncover opportunities in your business to channel investment or make game-changing savings that could grow your business, if that is what you are looking to do.
2. Invest in an accountant who knows digital
Not all accountants are made equal! Choosing an accountant who underpins their services with cloud-based technology that streamlines data entry, simplifies your bookkeeping efforts, and gives you instant insights into your business finances is a wise move.
Many accountants have been preparing for MTD for years, finding the right stack of easy-to-use digital tools to help their clients make light work of digital tax records and returns. Working with these digital-savvy accountants is a really smart move for your business. They’re often QuickBooks, Xero or Sage certified, and will recommend time-saving software like Dext Prepare, which will help you prepare the financial data from your receipts, invoices and bank statements, etc. that these solutions need.
3. Future-proof your software choices from the beginning
For some operations in your business, there are free software tools that can help you get started with automating processes. However, when it comes to accounting software, ‘free’ usually means it comes with a ‘freemium’. And by this we mean it will typically lack the vital functionality and accuracy needed to make your life easier.
When it comes to MTD, you need to choose an MTD-compliant software that is available whenever you need it (good uptime), with safe, secure and compliant data storage. This is important for both your accounting software, and the tools you use to prepare your data for those solutions. Making software like Dext Prepare a part of your process, you’ll not only be keeping your time commitment to the absolute minimum with clever automation, its data extraction accuracy is also proven to reduce accountants fees too, as it makes reconciliation much easier.
You could even argue that Dext Prepare actually makes your quarterly returns even less of a burden than your traditional annual return! Instead of filing your receipt and all the information that goes with it in a box or bag to eventually share with your accountant at year-end, you can simply forward an email or snap a photo of your receipt, and upload it to Dext as you receive it. In fact, there are nine fast and simple ways in which you can upload ‘paperwork’ to Dext - so it couldn’t be easier to drip-feed your invoices, receipts and bank statements throughout the year, in real-time. Think of it as a few seconds of admin each week, rather than hours dedicated to accounting at year end!
Once you submit your ‘paperwork’, Dext Prepare automatically processes, extracts and stores digital copies in our secure cloud storage system. So when you or your accountant need to check your records ready for your tax return, everything is already in place. No more time wasted searching for missing receipts. The data is stored for 7 years using bank-level encryption and is fully GDPR compliant, so you have the peace of mind that no documents ever get lost and you have easy access to your files should you ever need them. No more boxes or bags of receipts hanging around your office!
Your accountant will love it too, as Dext allows you to automatically set currency and tax rates by supplier to make sure you pay the right amount. There are loads of other useful MTD-relevant features you can explore to customise the way your business uses Dext, if you want to. Or simply leave it to your accountant to set it up for you. Safe in the knowledge that you’ll be avoiding the penalties associated with not complying with Making Tax Digital.
If you’re feeling ready and inspired to get your business finances ready for MTD, check out why 350,000 small and medium businesses worldwide choose Dext to automate their financial admin and start a free trial today.
