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The government's ‘Making Tax Digital’ initiative makes sense for HMRC, but it's also a chance for arts organisations to save time and money, says Mahmood Reza.

Photo of two Macbooks on a desk with notes on paper

Making Tax Digital (MTD) has been introduced to help HMRC with its stated ambition of becoming a world leader in digital tax administration. HMRC expects it to deliver just over £1bn from its implementation to 2022–23. Theresa Middleton, Director of Making Tax Digital for Business at HMRC, said that this would come from a reduction in manual steps where errors could arise, as well as reducing the risk of lost paperwork with more timely record-keeping.

It’s not expensive to adapt and develop systems currently in use

Since 1 April 2019 VAT-registered businesses above the threshold of £85,000 must keep digital records, as well as submit their VAT returns, using MTD-compatible software. Note that VAT rules have not changed under MTD – it is the way the information should be sent to HMRC that has changed.

MTD is deferred until October 2019 for businesses that are considered complex. These include:

  • business that are part of a VAT group or VAT division
  • traders based overseas
  • trusts
  • not-for-profit (NFP) organisations that are not companies (including some charities), though some are not registered as charities.
  • businesses that use the annual accounting scheme – this is where VAT is paid over a period of instalments, but only one VAT return per annum is prepared and submitted
  • local authorities.

Organisations below the £85,000 threshold can continue to use the HMRC online portal, but the digital requirements will become compulsory from April 2020 onwards.

Review processes

MTD therefore presents an opportunity for organisations to review their current processes and see if the underlying record-keeping, in terms of accuracy and treatment of VAT, stands up to independent scrutiny.

The choice and selection of software will be influenced, among other things, by an organisation’s existing level of technology, information needs and business model. For example, an arts organisation that doesn’t use much technology can use spreadsheet-bridging software. This extracts the contents of a spreadsheet and uploads it to HMRC, with no change to current accounting systems or ways of working. There is an abundance of cloud (online) systems already available.

Cloud systems make record-keeping more efficient, as processes can be automated and streamlined, representing a big step towards paperless working. Other benefits include the ability to track the costs and income of individual projects, easier reporting against budgets, more effective credit control, cashflow forecasting, and increased collaboration and access to information across the organisation. 

It’s not expensive to adapt and develop the systems currently in use. There will need to be an initial preparation for migration,  followed by migration to the new systems. But the costs of doing this are typically offset by the efficiency savings, the easier compilation of more powerful management reports, and not having to update and invest in hardware, software and automatic back-ups.

It's worth noting that MTD will be extended to other taxes, such as income and corporation tax from April 2021.

Mahmood Reza is Owner and Manager of Pro Active Resolutions and Knowledge Grab.

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