Making Tax Digital

A disaster for sole traders I’m afraid to say.

It will add significant costs and there is little benefit. Ignore the shiny adverts you have seen on TV, if you use an accountant for your accounts and annual tax return then its almost certain that same accountant will do the 4 Making Tax Digital (MTD) returns for you too.

Could you file them yourself? Technically, yes. The adverts say you can, but in reality, the vast majority of sole traders will use an accountant to do that for them

Declaring the income you have taken is fairly straightforward but this isn’t the case with expenses.  Are they allowable or not? For a cost to be allowable, it has to wholly, exclusively and necessarily for the purpose of the business. Defining what that means is part of the reason you use an accountant.  For example, what percentage of an expense like phone costs are allowable, what can you put down as use of home as office, how should stock be valued and what depreciation rates should be used? A qualified accountant works all this out when the annual accounts are done and the same process now applies to MTD.

You are effectively preparing a mini set of accounts each time an MTD return is submitted to HMRC. HMRC argue it allows for a tax forecast to be produced by them but you can ask your accountant for that already at a fraction of the cost. An HMRC tax forecast when your sales are variable is meaningless and indeed could lead to totally misleading information. For example, if you are in the garden maintenance business and submit your first MTD return in July, this is your high sales period. If a tax forecast is based on this it will give a much higher number than one which factors in the quieter winter months.

They won’t admit it, but MTD is designed for HMRC to obtain more information on you.

 It’s as simple as that.

HMRC Investigations

The number of investigations HMRC will conduct in the years ahead will increase significantly.

This is down to Artificial intelligence. Using Ai will vastly speed up the review of your bank accounts, lifestyle patterns posted on social media and comparison to similar business. It will give inspectors far greater tools to analyse and investigate returns submitted.

An investigation will happen for 1 of 3 reasons.

-       A tip off.

-       HMRC do not like what has been disclosed to them, or indeed you haven’t disclosed anything and are very late with filing a return.

-       A totally random selection.

It has been estimated 93% of investigations happen under the first two categories.

The first thing you must do when notified of an investigation is to tell the truth. In 99.99% of cases from that point, the worse that can happen to you is the payment of money to HMRC. There is a true story about the jockey Lester Piggott. He was under an investigation and ended up owing several million pounds in back tax, a huge amount at the time. When the settlement meeting came, he proceeded to give HMRC a cheque for the full amount but from an account he hadn’t disclosed to them. As a consequence of that, not because he owed several million pounds in tax, he went to prison for 3 years

How long an investigation takes depends on the depth. If it’s an aspect enquiry e.g. a specific thing is queried then it could be over in an exchange of letters but if it is a full enquiry on a particular tax year and that enquiry then spreads to other years, it will likely take months.

Unfortunately, if the investigation leads to more tax being paid, a penalty is charged which could be very significant. The amount will vary between 10% to 100% of the tax due depending on a range of factors, especially how cooperative, timely and honest you have been in dealing with the investigation process.

Getting Paid

Credit control starts the moment you meet your customer. When you quote for a job the payment terms are just as vital as the amount itself.

If you have to offer 30 or 60 day terms to get the work then that is bad enough. But don’t make that then turn into 60 and 90 days. The chasing process should not start a few days after the payment hasn’t arrived, many companies use every excuse possible to delay payment. The skill is to tackle those issues before the invoice is even due.

The credit control process:

-       Invoice on the day the work is finished.

-       Call your customer a few days after the invoice has been sent to make sure they have received it and if it has been approved for payment

-       If it hasn’t yet been approved find out how long before it will be and chase again then to make sure it has. If there is a query then deal with the issue before payment is due.

-       A week before the invoice is due speak to your customer again and ensure the invoice is on the payment run for the following week.

-       On the day before payment call again.

If you haven’t done this before its due then your customer could use any of the above to delay payment. If you do it before, they have nowhere to turn other than pay you.

There is an emotion about chasing money, some find it awkward. But as soon as you have finished the job and invoiced, it’s your money. Remember that, it will help focus your approach, you don’t need to feel bad about asking for it.