Making Tax Digital and online bookkeeping for small businesses

John Mayer, centre back row, with his TaxAssist team.

John Mayer, centre back row, with his TaxAssist team. - Credit: Archant

What software do you need for submitting tax and VAT returns online, and why is it best to work with an accountant as you switch to online bookkeeping?

As the Government's Making Tax Digital initiative is rolled out, many small business owners will face having to file their VAT returns via software for the first time.

Using bookkeeping software may be a daunting prospect at first but with support from your accountant it can be an easy transition. A good digital bookkeeping system is also a valuable business tool, enabling companies to manage their finances better and keep track of their business performance.

Making Tax Digital aims to digitise the UK's tax system and make it more effective, more efficient and simpler for taxpayers. As part of the initiative, UK businesses will have to maintain their records digitally and provide updates online to HM Revenue and Customs (HMRC) using approved software.

In the first phase of Making Tax Digital, digital recordkeeping became compulsory for VAT-registered businesses with a turnover exceeding the £85,000 VAT threshold, on 1st April 2019. This means affected businesses must maintain digital records and can no longer file their VAT returns for periods beginning on or after 1st April 2019 using HMRC's Government Gateway.

John Mayer is Director of TaxAssist Accountants, based in Weston-Super-Mare, and is also Area Lead, Somerset Wiltshire and Dorset region of the Federation of Small Businesses. Here, he answers some of the key questions smaller companies ask as they prepare to switch to software.

Which software do I need?

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"The first thing to do is ascertain as to whether you definitely are caught within the Making Tax Digital requirements: are you VAT-registered with turnover above the VAT registration threshold (currently £85,000)? Having ascertained that, a decision has to be made as to how your records are kept - spreadsheets or bookkeeping software. Mandated businesses can no longer keep handwritten records under Making Tax Digital.

"If you opt for spreadsheets, you will almost certainly need some bridging software to link your spreadsheets to HMRC's online system. It will then be possible to file your VAT returns online."

What is the best bookkeeping software for small businesses?

"If you're affected by Making Tax Digital and are looking for bookkeeping software, it's important to check HMRC's list of compatible software. There are currently more than 300 different software solutions available for businesses.

"My accountancy practice has used QuickBooks for more than six years and we recommend it to our clients, who have really appreciated that they can use it without too much help from ourselves. We also use Xero, which is another bookkeeping software. For businesses that use spreadsheets, we offer bridging software to connect their spreadsheets to HMRC's online systems."

What other advantages are there to using bookkeeping software?

"Provided that records are kept up to date, bookkeeping software can be a valuable business tool. You can raise professional invoices, keep tabs on customer balances and send out reminders for overdue invoices. Some products have neat features like bank feeds which can help reduce data entry and there are other elements that can be plugged in, such as PayPal transactions.

"In addition, some products can generate reports that help you manage your business finances by showing you things like margins and profit, supplier balances and customer reports. Some dashboards present the information in graphs and trend lines, which can be easier to digest.

"If you have a smartphone, most of the big players in the market offer a mobile app. Quickbooks has an app which uses your mobile phone to photograph receipts, which automatically feeds the expense through to QuickBooks Online. Through Optical Character Recognition (OCR) technology, QuickBooks then locates the corresponding payment with 96% accuracy. This significantly cuts down the time it takes to complete bookkeeping and may improve accuracy."

Why should I use an accountant if I can use the bookkeeping software myself?

"You are not required to use an accountant to prepare your accounts or tax return. But engaging an accountant can bring real value to your business and they can offer much more than just bookkeeping.

"Using an accountant gives you peace of mind that your affairs are being dealt with accurately and in a timely manner. They should ensure that you're claiming all the expenses you're entitled to and will look for any tax planning opportunities or allowances that you may be eligible for. They should offer advice on the type of entity you trade through or what VAT scheme might be appropriate. They should also be able to advise you how you should pay yourself from the business and what the tax impact might be.

"If you're a fledging business or seeking finance or a mortgage, having a robust, professional business plan behind you prepared by an accountant, is powerful. And once the business is at a reasonable size, delegating your bookkeeping function to an accountant can be a huge relief and leaves you to concentrate on the business. With access to up-to-date information about the business, your accountant can also provide you with management accounts that can give you a mid-year snapshot of the business' performance."

TaxAssist Accountants Weston-Super-Mare provides a wide range of services including tax returns, annual accounts, payroll and bookkeeping. It's part of the UK's largest network of accountants, helping a diverse range of small businesses including start-ups, sole traders, limited companies and landlords. TaxAssist prides itself on offering a very personal service, taking a real interest in its clients. TaxAssist will look after the time-consuming paperwork and tax filing requirements, freeing up clients to focus on their business.

For more information click here or call 01934 429663.