Ben Dyer, CEO of Powered Now, provides a beginner’s guide for tradespeople to start their tax year on the right foot.
Over the course of the pandemic, the trades has been welcomed as a haven for job growth. With hundreds of thousands employed in the construction and trade sectors respectively, the popularity of these careers has grown exponentially, with 18% of Brits considering the trades as a career due to the pandemic. With the commencement of the new tax year, it is essential that for the influx of new tradespeople in the UK, they are up to speed with how to best prepare their finances. Powered Now, field service management software of the trades, has compiled its beginners guide for filing taxes in accordance with HMRC’s Making Tax Digital scheme.
Making Tax Digital
Making Tax Digital (MTD) is HMRC’s initiative to bring all record keeping relating to tax onto digital platforms. Becoming compulsory from April 2023, many businesses need to start giving some thought to MTD, but may not have done so. As a result, they are probably in for a bumpy ride and this could be a painful time for trade businesses like plumbers, gas engineers, electricians and builders.
The argument for the implementation is that in the long term it will be better for honest businesses while they will collect more tax – known as closing the ‘tax gap’. Critics argue that it will be much more work for everyone and is being badly implemented to boot. The specifics of MTD for VAT were twofold:
- All quarterly VAT reporting needs to be done through new technology. The old web form has been dropped and software that talks to the new MTD portal must be used for VAT returns.
- There must be a link from the individual records to the VAT return and these records must be kept on computer.
Are we ready For MTD?
AccountingWeb and system supplier Quickbooks undertook a survey of 271 accountants and the top concern, at 35% of responses, was client’s poor record of book keeping. The big danger with data being plugged straight through to an MTD return, with little opportunity for review, is that the proportion of wrong returns will soar, at least initially. Given that errors are likely to be in both directions, this is somewhat worrying. Businesses could either end up over-paying which is bad for cashflow or underpaying and then getting an unexpected catch up charge later which is also bad.
How do tradespeople work with accountants?
The critical thing in determining the way to address MTD is to start with the way that you currently work with your accountant (if at all) and how you want to work in the future. There are broadly two ways of working:
- You submit your own returns to HMRC.
- You pass information to your accountant and they do the returns for you.
It’s likely that as each MTD deadline arrives you will continue to work in a similar way. The big difference is that your sales and supplier invoices and expenses must all be recorded digitally. It will be against the law to simply total up the amounts of VAT, sales and costs. They must be put into a system by either you or your accountant. That’s the big change.
There is one important point to note which is that at the moment the detailed information can be entered onto a spreadsheet and then ‘bridging software’ can be used to submit it to MTD, at least for VAT returns.
Complying with the law
MTD requires at least one system and there are really only three ways of complying with the law:
- Run a system under your control that enables you to capture all the information you need for HMRC returns and submit it to MTD from your system.
- Use a system to capture all the necessary information and send it to the system used by your accountant or bookkeeper, then they send it to MTD.
- Send copies of all of your paperwork to your accountant or bookkeeper and they key it into their system and submit to MTD from there. This may come with a higher price tag and has the maximum danger of accountants being unable to cope.
Making your choice
At the moment, a minority of trade businesses use accounting software under their own control for their HMRC calculations.
However, it may be possible to kill two birds with one stone as businesses that do not use a computer system to manage their business will find big benefits if they start to do so. MTD could be the reason for adopting such a system but the benefits might be the reason for being pleased about the initiative.
The important point to consider is that a system can be implemented to make it easier to submit data to the accountant as an alternative to posting paperwork with the attendant inefficiency and expense.
“Every trade business should be considering their plans for MTD,” says Ben. “If they do things themselves, they can turn to a specialist trade-based software company, such as Powered Now. Most such systems nowadays can also automate the feeds to accounting systems. If they already have an external accountant to submit their HMRC returns, they should be talking to them as soon as possible. My strongest advice would simply be this – don’t get caught out at the last minute, and plan early so that your finances are in check throughout the year”.