With less than a year until many businesses will be required by law to transfer their accounting records to digital software, many are still unprepared for the change.

Sarah Case, director at Broomfield & Alexander in Monmouth and Newport, considers the latest plans and explains the importance of getting your business prepared.

There is no doubt that, for businesses who have not moved their accounts across to digital platforms, the UK government’s plan for Making Tax Digital (MTD) is one of the biggest challenges they will face over the coming 12 months.

The proposed timing for the change in legislation has been a matter of debate, with some business groups (and the House of Lords) calling for a delay in its implementation to give businesses, particularly SMEs, enough time to make the transition in a planned and orderly way.

Initially, these calls for extra time have been largely ignored. There are some who point to the fact that MTD has disappeared from the ‘slimmed-down’ Finance Bill (2017) presented in the House of Commons following the decision to call the recent snap general election as a sign of possibly delays. However, most commentators expect the digitisation of tax to remain on the agenda, not only because it will put our businesses in a better position to face the challenges ahead (including the impact of Brexit), but also because it carries with it a potential and ongoing revenue boost for public finances.

The average cost of 'bringing tax arrangements into the digital age' is estimated at £280 per business by the government, followed by small ongoing annual savings.

However, is in stark contrast to the Federation of Small Business estimate of £2,770. These figures are not only important to businesses themselves, but also to the Treasury, as these ‘conversion costs’ will be tax-deductible expenses that will also hit HMRC in the pocket.

Our belief is that the reality will be somewhere in between so, unless the government springs any new surprises, we expect the timetable to remain fairly static.

This means that from April 2018, unincorporated businesses (including landlords) with an annual turnover above the current VAT registration threshold of £85,000 will be required to keep their records digitally and submit a quarterly report to HM Revenue & Customs.

Other businesses which fall outside these thresholds will be working to a slightly different timetable, but the vast majority will need to be compliant by April 2019.

For businesses which have always kept manual records, such as invoices, receipts, and spreadsheets, making the switch may come as a bit of a shock to the system. Those already using accounting software will need to ensure they have the capability to provide quarterly updates which will satisfy the requirements of HMRC. These electronic updates will not be accounts as such, and will not need to include details like stock valuations or tax adjustments, but will need to follow a certain format.

Those who aren’t using accounting software should seek advice on how to meet HMRC’s requirements. Well-known software packages, such as Xero, Sage and Quick-books, collate accounting records digitally and should fulfil the new criteria. However, users should contact their supplier to make sure it’s fully compliant. Most suppliers are starting to release information about these changes now.

So, what will the changes mean in practical terms? Businesses will still be able to use spreadsheets to record receipts and expenditure, which they can then link to their software to automatically generate and send their updates to HMRC. Most assumed this was going to be the case, but we are generally encouraging the use of integrated software as this will bring other benefits. We understand that free software will be available to the smallest businesses, although we don’t yet know who will be providing this or what the eligibility criteria will be.

There are a number of important exemptions from the changes. For example, all self-employed workers and landlords with a turnover of under £10,000 a year will not have to keep records digitally or make quarterly updates. Charities will not have to comply, although any of their trading subsidiaries will. Also, the option to account for income and expenditure on a simple ‘cash in, cash out’ basis will be offered to self-employed businesses and unincorporated landlords below a certain threshold.

With the recent ransomware attacks bypassing some of the world’s most advanced cyber security systems, data protection will be a significant concern for many business owners. Security should be a major factor in choosing a software supplier, but there are various safeguards that all businesses can put in place to protect themselves. These include the basic steps of keeping computer operating systems up-to-date and regularly backing up data, to the education of employees on how to identify potential IT threats and the development of plans to respond to different types of security breaches.

Business will have at least 12 months to become familiar with the changes before any late submission penalties will be applied, and HMRC has undertaken to ‘re-consult’ next year on an alternative penalty model. The new digital systems are being piloted with hundreds of thousands of businesses before being rolled out but forewarned is always forearmed, and businesses that start preparing now will find the transition to digital accounting much easier when it arrives.