Why you should adopt cloud accounting sooner rather than later
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Adopting cloud accounting has always had its benefits, but HMRC’s impending new tax system makes it even more pertinent. Paish Tooth explains...
Making Tax Digital (MTD) comes into force on April 1 2019, and will apply to all VAT registered businesses with a turnover above the VAT threshold of £85,000. So if your business falls into this camp, it means that your first VAT return period starting after April 2019 will need to be submitted under the new MTD rules.
The main thrust of the MTD rules is that you’ll be required to maintain your accounting records and submit your VAT returns digitally, using ‘functional compatible software’. In practical terms this means that you will no longer be able to use manual books & records or spreadsheets for administration purposes. HMRC have issued draft guidance and example customer journeys to illustrate how they expect this to work in practice.
The simplest solution to ensure compliance is through cloud accounting, which is online software accessible anywhere where you have internet access. It will still be possible to use desktop software, but only if it has been updated to comply with the new rules.
How MTD will affect your accounting deadlines
Say you’re a sole trader, and your VAT quarter ends on April 30 2019 (a month after the introduction of MTD). In this instance your records will need to be in digital format as soon as February 1 2019. Unless your accounting year end happens to be on January 31 2019, this would mean producing annual accounts from two different sets of records – one manual up to January 31 2019 and one digital from February 1 2019. This would complicate the preparation of your annual accounts.
The best time to move to cloud accounting is shortly after your business year end. Changing to new software at the last moment is not recommended, as it won’t give you enough time to get to grips with such a huge change in your administrative processes.
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Why is cloud accounting such a good solution?
The benefits of cloud accounting can be seen instantly – it streamlines business administration and most importantly, it saves you time! Here’s what it allows you to do:
• Create quotes and turn them into sales invoices quickly
• Capture receipts and payments automatically from your bank account
• Keep up to date with your customers debts
• Check instantaneously who you owe money to
• Automatically deal with recurring transactions and ‘learn’ how to analyse expenses
• Generate VAT returns with one click
• Be HMRC compliant
Even if you’ve passed your year end, re-doing a few months can be done very easily using automatic data imports from existing systems, and it allows the software to ‘learn’ how to deal with recurring transactions. It is also great practice to use real data rather than imagined scenarios, as it allows you to understand how the software works.
MTD in the future
HMRC believes introducing MTD will reduce the tax gap and decrease errors in record-keeping. It is currently operating a limited pilot scheme, and by 2020 intends to have rolled out MTD to further taxes such as Income Tax and Corporation Tax. So even if you’re not currently over the £85,000 VAT threshold, it is well worth moving onto digital software now to keep ahead of the times and reap the benefits it provides.
HMRC are also developing a penalty regime, which is being designed to encourage early adoption of the new MTD rules. There will be a 12 month ‘soft landing’ period without penalties while businesses update their systems to be fully compliant, but after April 2020 you had better watch out!
By the time MTD is fully up and running, you’ll be required to submit four reports a year, plus a final report including year end adjustments to your quarterly figures, which will be due 9 months after the end of the accounting period. This means your records will need to be completed far earlier than you may have been used to.
If your VAT quarter end does not currently tie in with your business year end, then we strongly recommend you align this now – which can be done by logging into your HMRC account.
At Paish Tooth we are experts with both Xero and Quickbooks software, and can help make your transition to cloud accounting as seamless as possible. Give us a call to discuss your options and see for yourself how easy it is to use the latest cloud accounting software.