With the deadline for Making Tax Digital (MTD) swiftly approaching, many businesses are facing a tough decision about how to comply with these looming requirements. In brief, Making Tax Digital requires businesses to submit their VAT return information directly from their book keeping software to HMRC, with effect from 1st April 2019.
Software providers have been preparing for this change for some time and the list of compliant book keeping and accounting packages continues to grow. The days of typing in your VAT return figures on the HMRC website are rapidly disappearing and businesses will need to ensure their book keeping method will communicate directly with the HMRC portal.
For businesses who currently maintain their financial records using a manual cashbook or spreadsheet, you are faced with two options – convert to a book keeping package which is MTD compliant, such as Xero, or adapt your existing system to an “API enabled spreadsheet cashbook”.
“What is an API enabled spreadsheet cashbook?” I hear you ask. Well it’s a spreadsheet which has the ability to submit data directly to HMRC for your VAT return. This may appear to be an appealing option for businesses, but it comes with a few words of warning…
Firstly, the developers of these spreadsheets are providing this solution as a direct replacement for a cashbook. The controls, checks and balances which appear in proper book keeping software are not present in these spreadsheets. The scope for error is significant and the information submitted to HMRC will only be as accurate as the data on the spreadsheet.
Secondly, these spreadsheets don’t provide valuable management information, such as profit and loss accounts, cashflow expectations, debt collection reports etc. Businesses should view the challenges presented by MTD as an opportunity to improve their financial reporting and management.
Thirdly, there is a further requirement for businesses to provide an electronic link from the first recording of a financial transaction through to the final submission on their VAT return. HMRC are allowing businesses a period of grace to meet this requirement with a “soft landing” until April 2020. I would expect to see this deadline extended further, but we can certainly see this part of HMRC’s plans for MTD. What this means is that your MTD solution will need to have the ability to capture or link to the first recording of all financial transactions in the future. For example, if you issue a sales invoice then this will be considered to be the first recording of that sale. Your MTD solution will need to be able to generate sales invoices or link electronically to the package which does this for you. Most API enabled spreadsheets don’t have this facility and therefore won’t be compliant at some point in the future.
Finally, there are no guarantees that the developers of these spreadsheets will continue to maintain and support them in the future. Software developers who specialise in book keeping and accounting packages have a reputation to maintain, so ongoing development and support is guaranteed.
My recommendation is to take the plunge - adopt a formal book keeping and accounting package, such as Xero rather than using a spreadsheet to do what you’ve always done. By making best use of the additional financial information at your fingertips you can take control of your profitability and improve your cashflow.