Making Tax Digital: why you should embrace it
The government is about to introduce huge changes to the UK tax system that will fundamentally affect the way you record and submit your tax information to HM Revenue & Customs, writes Matt Perkins of accountancy app 1Tap Receipts .
Essentially, the tax system will to move from a yearly submission process to a quarterly digitally reported one. On the face of it, the new system (‘Making Tax Digital’) may sound like a disaster waiting to happen. Most sole traders and freelancers struggle every year to get their bags of receipts and hastily typed up (or even written) list of invoices to their accountant -- often a couple of weeks before the submission deadline.
To any rational business person this is a crazy state of affairs. It’s not good for anyone involved and can lead to higher accounting fees (as the spend extra hours sifting through your piles of paperwork), and a nasty surprise tax bill at the end of the year because you didn’t realise you owed that much.
So instead of regarding the introduction of this new quarterly system with dread and fear and assuming it is just another way for HMRC to squeeze more tax out of you, consider these four reasons why you should embrace this change for your financial health:
1. You almost definitely aren’t claiming all your legitimate expenses
Sole traders and freelancers don’t claim anywhere near enough of their legitimate expenses. In fact, three in five admit they can’t be bothered to mess around claiming low value receipts. This is a huge mistake -- around 60% of expenses are under £20. And all those small claims will add up. For instance you can claim up to 20p in every £1 you earn back against your tax bill through claiming properly.
2. You’ll save yourself a lot of stress each winter
It’s the annual pantomime performed year after year! You start worrying in November, panicking in December and then all out meltdown in January as you scramble around looking for all those faded receipts. If you use a simple app like ours, you’ll save yourself a huge amount of stress and know exactly where you are all year around. Plus, by being up-to-date and organised, you might get favourable rates from your accountant and avoid that unexpected tax bill.
3. You can actually make informed decisions at last
So now imagine that you are snapping all your receipts as you go and getting a better view of how much you are saving on your tax bill. This means that rather than guessing your financial health through rough guestimates on how much goes to HMRC, you’ll have a firmer grasp on your liabilities, allowing you to make informed decisions.
4. You’ll increase your creditworthiness immeasurably
Having a clearer and more accurate view of your
finances doesn’t just have a positive influence on your business finances, it
also empowers you personally. Many sole traders and
freelancers not only experience problems getting credit for business purchases,
but also for mortgages and other personal loans. This is mainly because
their income and personal finances are effectively one in the same. Lenders
find it difficult to make favourable decisions based often outdated accounts. But
a successful implementation of MTD should mean that you will be in a much
stronger position to prove your financial health. And then lenders will have
much more information on which to make an informed lending decision.