From Paper to Progress: The Real Benefits of Making Tax Digital

There is no doubt that the introduction on 6 April of MTD for IT is one of the biggest changes to tax administration in a generation; and HMRC’s decision to not provide free software means that all taxpayers affected will see an increased cost in fulfilling their tax duties.

However, there are also positives to this new system and, once the new system is embedded, we are looking forward to working with our clients to make the most of the advantages the new system offers.

The main positive is the ability to advise in real time. Having up to date financial information every 3 months will enable us to review your accounts regularly, if you would like us to do so, and the presence of management accounts will enable us to: 

• Review the tax payments due in January and July and reduce them as needed. The MTD submissions are cumulative over a year so by the time the tax payments are due we will have a realistic idea of how you are doing and will be able to suggest the best tax payments to make whilst ensuring late payment interest would not be due. Tax repayments can take a while to be issued – and no-one wants to pay tax that isn’t due!
• End of tax year planning will be easier as we will already know how you are doing. This will be especially important if your income is close to one of the thresholds, such as £60,000 for the claw back of Child Benefit or £100,000 when free childcare may be lost, as well as the Personal Allowance. We can also advise on: The right time to purchase new plant and machinery so that the appropriate tax allowances can be claimed at the most beneficial time, and consider the payment of pension contributions to reduce tax liabilities.
• We will be able to see if any of your customers are regularly defaulting and give you prompt assistance in controlling debtors. This may be particularly relevant for landlords if tenants are in arrears! Likewise, keeping a close eye on cashflow and profit forecasts allows you to move forward confidently or secure help sooner if needed.
• A further cashflow advantage is that we will be able to see, where appropriate, if you have any “excess income” that could be gifted to ensure all relevant Inheritance Tax exemptions are being utilised.

If you have taken the opportunity to move onto a cloud software such as Xero the ease of linking a bank account to the software means that a dedicated business bank account will become more attractive.  One big advantage of this is that, in a worst case scenario of HMRC looking into your affairs, they will only be able to see your business transactions.  HMRC will have to provide a reason for wanting to see a private account.  This also means less work at year end, as we won’t have to remove your private transactions.

We also anticipate that we will be able to provide your final accounts more quickly as we will have a lot of the information on hand already.  If you are looking for finance or a mortgage the information will be more up to date and will give both you and prospective lenders a better idea of your financial position.  And not to mention that you are more likely to remember what any unidentified transactions are if we can ask the question within 3 months rather than (potentially) 19 months later!

So, whilst change is always unsettling, we are moving ahead with MTD secure in the knowledge that this change will ultimately help us to help our clients to achieve their goals and have peace of mind about their finances.