My MTD Survival Guide: The Cost of Compliance (Part 2)

Last time we discussed what changes are coming to make more and more small businesses connect electronically with HMRC as well as report their finances on a quarterly basis (see Part 1). This time we’ll look at what impact those changes will make on how you run your business.

Reviewing your record-keeping system

The requirement for no manual re-entry and digital links effectively means that some software purchase is required. It’s estimated that even the cheapest solution will cost around £150 per year with total costs to make the changeover being around £330.

HMRC have an approved list of software suppliers they will accept digital links with. Any software you purchase or subscribe to must explicitly say that it is MTD compatible (including VAT if applicable) and, if you work with an accountant, have the capacity to link with them too.

Also, consider that once set up it may be increasingly inconvenient to switch to another provider in the future and set up your digital links again and migrate all your financial data (e.g. uploaded receipt images). There are also some concerns that reliance on third party, potentially cloud-based solutions, may have data protection risks. A decision needs to be made, though, and it may be advisable to engage an accountant or financial professional.

There are two ways you can set up your accounts. If you’re using spreadsheets, you can keep doing that, but you’ll need some bridging software that reads the spreadsheet and transfers the information to HMRC without any more manual entry. Or, you can use a full accounting solution, generally provided by a software house. This one stop solution means you enter your accounting information and the same software will submit the information directly to HMRC.

Which software should I buy?

A couple of notes. 1) Costs are approximate and might have changed. Always check with the official provider for current pricing and terms. 2) FreeAgent is free of charge to customers of certain banks as part of their business account offer (NatWest, Royal Bank of Scotland, Ulster Bank, or Mettle)

Penalties for Late Submission

Apart from the costs of implementing a way to report for ITSA, you should also consider the penalties of poor compliance. Rather than set fines, HMRC are implementing a points-based penalty system.

One penalty point is incurred per late submission.

If these penalty points build up to four points, you will receive a £200 penalty.

If compliance improves, your points expire after 24 months.

HMRC can cancel or reset penalty points for certain circumstances e.g. insolvency.

£200 may not seem much but, if the penalty points remain high, the penalties will continue to be charged. If you reach the need for a penalty, you’ll have to avoid the next submission being delayed 3 months later. This might lead to a cycle of financial difficulty.

Businesses can no longer afford to leave their tax reporting till the end of the year to sort it out.

The Benefits of MTD

This obligation to report more regularly can be seen as an opportunity. Setting up a system to categorise all income (e.g. self-employment income, property income, dividend income, savings interest) and expenses as they occur will give you a clearer idea of your cash flow, current debtors and invoices that require chasing.

Developing a habit of updating your records once a week or once a fortnight means you will be clearer on where your money is going and will help you know how healthy your business actually is. You may even get better insights into which times in a quarter or year’s cycle are better for investing in your business or marketing campaigns. Better, clearer accounts gives you a better chance of successfully applying for funding or credit.

As you consider investing in software, consider automating other parts of what you do e.g. reading PDF bank statements or supplier invoices.

What to do now

Step 1: Register at Sign up for Making Tax Digital for Income Tax – GOV.UK

To successfully sign up for MTD ITSA, you must already have the following:

• A Government Gateway ID and password
• Your business’s VAT number (if applicable)
• A business email address
• Your National Insurance number
• Your company registration number
• Your Unique Taxpayer Reference (UTR)

Step 2: Connect your chosen MTD-compatible software to your HMRC online services account.

Step 3: HMRC will confirm your registration by email.

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