Will Making Tax Digital affect my cash flow?

Making Tax Digital (or MTD) is major initiative by the Government and HMRC to make it easier for individuals and businesses to keep on top of their tax affairs – well that’s the theory.

One of the most significant steps as far as businesses are concerned is the introduction of Making Tax Digital for VAT and, from 1 April 2019, all businesses will be required to keep their records digitally and use software to submit their VAT returns. (Other business taxes such as Corporation Tax have been placed on hold until April 2020).

If you are using one of the main cloud accounting software packages like Xero or Quickbooks, there is no cause for alarm. You will be keeping your records digitally and the chances are, you are already submitting your VAT returns online.

Should you still be relying on paper records or a spreadsheet, however, now could well be the time to making the leap to an accounting software package. There are several on the market (we have mentioned two of them already) and with the support of your bookkeeper or accountant, you should be able to find the one that’s right for you.

We recommend Xero and Quickbooks because they are very well established, easy to use and well supported. Most important of all, they also integrate seamlessly with CaFE!

There isn’t going to be any change in when your VAT returns are due and, if you are paying by direct debit, the money will continue to go out on the 10th working day of the month following the one in which you submit your return. From a cash flow perspective then, Making Tax Digital, shouldn’t make any difference at all, other than it might help iron out some of the human error that either ends up in you paying too much or finding yourself faced with an unexpected bill a few months further down the line.

Predicting the VAT, digital or otherwise, is the hard bit for most small businesses. Even though the need to submit a return comes around every quarter, it can still catch a business by surprise and create a pressure on cash flow, particularly if it is trading at or below break-even – it’s all too easy to treat the VAT element of invoices as available cash while it’s in your account, perhaps leading to a need to for short-term funding in the form of a VAT loan to pay the tax when it falls due.

CaFE helps you manage this situation as it will calculate the VAT that is due at any particular point by synchronising with your cloud accounting package and put this into your projections. You can also budget for the VAT in future quarters using the new budgeting feature and monitor your performance against the plan day by day. The ability to look at your budget and cash flow from above in this way gives you more time to review your business performance and determine what to do.

Here at CaFE, we think Making Tax Digital is a good move. Change is always difficult when it’s imposed, but moving businesses towards more modern and reliable bookkeeping methods in this way opens up the potential for them to go on to explore other applications like CaFE and make their lives significantly easier.

November 12, 2018 by Makoto Fukuhara Categories: Accountants and bookkeepers