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The Basics of MTD for SMEs

Making Tax Digital (MTD) is a policy from the HMRC.  It will require all small and medium-sized enterprises (SMEs) to make changes to the way they report and pay tax to the Government.  It is therefore the most significant change to the UK’s taxation system in years and will have a major impact on every SME and owner operator in the UK.

HMRC says that MTD will increase the tax take through the reduction of errors, reduce their costs and free up their resources, and provide an enhanced customer service.  They also expect that the increased focus on their accounts will help SMEs manage their businesses better.

There are many strands to HMRC’s digital strategy but the main three issues which you need to be aware of are as follows:

• compulsory digital record-keeping;
• quarterly online submission of information to HMRC, with penalties for non-compliance; and
• an online end of year update within 10 months of the end of the accounting period or 31 January, whichever is the earlier.

The timescale for introduction is potentially short, with HMRC proposing the following:

• April 2018 if profits are chargeable to income tax;
• April 2019 for VAT; and
• April 2020 for corporation tax.

SMEs will need to start digital record-keeping and reporting for their first accounting period that starts after 5 April 2018.  For example, a business which prepares accounts to 31 August each year will need to be digital from 1 September 2018.  Their first quarterly update would be due in December 2018, covering September, October and November 2018, and they would need to keep reporting quarterly from then on.

It is expected that MTD-ready software will be available towards the end of 2017, and so should be ready for deployment in early 2018. 

Overall, this means that if you run a small business, you need to start thinking about how you will adopt MTD.  Having said that, at this stage it is not clear exactly who will need to act, or quite what they will have to do.  For now, we would recommend that you watch developments closely, so that you are able to take action at the right time – late enough that the position is clear, but early enough that you have time to do it properly.

It should be noted that some businesses will be exempt from the main requirements of MTD.  This should mean that the smallest businesses, those that cannot reasonably use digital systems, and charities will be less affected.  However, it is not yet clear exactly how far these exemptions will extend, and what obligations will still remain for exempt businesses.