Are you ready?
Hurray! HMRC have finally revealed more details about the controversial plan called ‘Making Tax Digital’. In fairness to HMRC, they have been reluctant to release details until the first round of consultations were undertaken.
However, this silence could have worked against them. It seems that Making Tax Digital has bypassed a large majority of small businesses. In a recent survey carried out by FreeAgent, 43% of small businesses and freelancers reported that they haven’t heard of the plan for Making Tax Digital.
HMRC should find this a worrying statistic.
If you find yourself amongst this 43%, don’t panic. Our article explains what Making Tax Digital is and the key points you need to know as a freelancer or contractor. So don’t be afraid, be prepared.
What is Making Tax Digital?
Making Tax Digital (MTD) is an ambitious Government plan (that was first mentioned in the Spring 2015 budget) that will change the annual tax return to a quarterly online system.
The tax system is often described as archaic and slow. HMRC argue that Making Tax Digital will:
- Bring business tax into the digital age
- Transform the tax system
- Simply tax for small businesses
Details were slow coming forward, but information put out by HMRC shows that:
- Making Tax Digital currently only applies to sole traders and partnerships
- Businesses with a total annual turnover less than £10,000 will be exempt*
- Business will need to send summary data each quarter to HMRC , and not file quarterly tax returns, as first speculated
- Consultations will be held later this year (estimated to be October) for how Making Tax Digital will affect Limited Companies and their directors
*The important point to note here is ‘total annual turnover’, if you run two businesses, each with a turnover of £9,000, you will have to comply with Making Tax Digital, as your annual turnover is £18,000.00.
What does Making Tax Digital mean to you as a Contractor or Freelancer?
As the name implies, tax is turning digital. So in order to comply with Making Tax Digital, businesses will need to send their quarterly summaries into HMRC using an online accounting software. This software will not be provided by HMRC, but reporting online will be mandatory, except for a select few who will be exempt.
Exemptions will be considered for disability, age, remoteness of the location and any other reasons (not currently specified by HMRC).
So, we are afraid that saying “I am a technophobe” or “My broadband is too slow” will not cut it (anyone with access to broadband with speeds 2Mbps or faster will have to submit their updates online).
However, you don’t have to stick to quarterly reporting, if you want to do it more frequently, you can, monthly for example.
How you can prepare yourself for Making Tax Digital
Details are still being finalised, and consultations are still taking place. We urge you to voice your thoughts and concerns (if you have any) to HMRC. They are running a series of events and webinars where you can find out more information and ask questions. To find out more information on these consultations, click here.
Making Tax Digital will be rolled out from 2018. So, it is time to start thinking about getting ready for it. ICAEW reported that only 25% of small businesses currently use online accountancy software. If you will be required to comply with MTD, is advisable to start looking at which online software is the best for you. Additionally, if your accountant does your return for you, ask them if they can support you in Making Tax Digital.
If you are looking for expert advice on how you can move your finances online, give us a call on 020 8952 2234 or email info@cogentaccountants.co.uk