The government’s new plan, Making Tax Digital, has been designed to modernise tax accounting for British businesses. As of 1st April, businesses that turn over more than £85,000 will be required to submit their VAT records digitally instead of using the traditional HMRC portal.
Businesses turning over less than the £85,000 threshold can opt-in the scheme but it is not compulsory. Here, we outline the steps to take towards making your tax return digital.
Sign up for a digital tax account
If you don’t already have a digital tax account with HMRC, you’ll need to sign up for one. You can do this through the HMRC website or ask your accountant to help. A digital tax account allows everything to be kept in one place and for tax to be submitted digitally.
Find the right software
Next, you’ll need to find compatible online accounting software to record your transactions and invoices, or bridging software that can collate transactions recorded in an Excel spreadsheet.
Most bridging software is free, while online accounting software, such as Xero or FreeAgent, incurs a monthly fee or upfront charge. However, what you spend on software, you may save in time spent filing accounts, plus you can claim the costs as a business expense.
Many banks have digital integrations with online account software providers so that your bank transactions can automatically sync with your accounting software. For example, if you use Starling Bank for your business account and you sync it with online accounting software provider Xero, your bank feed will be automatically updated in Xero, in real time. This way you can keep track of transactions instantly without manually downloading or uploading any documents. FreeAgent will be the second online accounting software provider to be fully integrated into the Starling Bank app. Other online accounting software apps can be used by Starling business customers through uploading CSV files.
The full list of online account software providers that are compliant with HMRC can be viewed on their website.
Create digital entries for paper invoices
If someone sends you an invoice in the post, this needs to be entered into your system or spreadsheet to digitise it. You’ll need to extract and record four key pieces of information: the net sales figure, the net cost figure, the net purchase figure and the net VAT figure. Other business details such as your business name and directors will also need to be recorded digitally.
Switch to Making Tax Digital for VAT
Experts advise that the sooner businesses start filing tax digitally, the better. This will give you some practice with the new system before it becomes mandatory. If you have an accountant, you’ll have more time to ask questions and iron out any problems.
To find out more about Making Tax Digital, go to the HMRC website. For business accounts that have no monthly fees, can be set up in minutes and can be integrated with your Xero account, have a look at Starling Bank.