The government’s new Making Tax Digital (MTD) initiative has got the small business world in a lather as people try to figure out what it means for their businesses, when it might happen, and whether or not it’s going to be helpful or harmful
Among the many areas of conversation surrounding MTD, one of the most talked-about is the new emphasis on real time tax. What does it mean for your business? How would it work? And what is it, anyway?
Real time tax is a way to get a sense of what you’ll need to pay at the end of the year at any given time throughout the year
The way things are now, you run your business throughout the year, receiving income and paying expenses. Ideally, you track those income and expenses as you go, giving you an overview of how much you have coming in and going out at any given time. But there’s one big payment that always seems to be up in the air: your tax bill.
Since your tax obligations are only calculated at the end of the year, when you file your annual tax return, there’s no way to really know how much you’re going to have to pay.
While there’s a lot of conventional wisdom that goes around about how to prepare for this — for instance, the thought that you should put aside a third of your income for taxes — you don’t really know what’s going on until that annual return is completed. This not only makes it difficult to make accurate financial projections throughout the year, it can leave you with a lot of anxiety about your finances as you’re coming up to tax season.
Switching over to real time tax will make these issues a thing of the past
Under the real time tax approach, you’ll be able to see your tax obligations throughout the year, instead of getting a big surprise after your annual return. As you upload your business’s financial data into the new MTD interface, it will automatically calculate the tax you owe as things stand at that moment.
This will allow you to have a sense of how much you’ll have to pay at the end of the year, which makes it much, much easier to budget, and much less likely that you’ll get stuck with a surprisingly high tax bill at the end of the financial year.
A couple of myths about real time tax…
Like the rest of the MTD initiative, there are lots of rumours and misunderstandings about what real time tax is and what it means for your business.
Real time tax does not mean that you have to pay tax throughout the year.
Just like the persistent misunderstanding that you’ll have to file four tax returns throughout the year under MTD, some people have the fear that they’ll have to pay their taxes four times a year as part of participating in real time tax. This isn’t the case though. Real time tax simply gives you an overview of what you can expect to pay at the end of the year. You’ll still pay the same way you did before, you’ll just have a better idea of what that end number is going to be in advance.
Real time tax does not mean that you’ll have to make a huge transition in your accounting.
Similarly, many people are worried that they’ll have to learn a whole new system of accounting, or make huge changes in their business just to remain compliant with MTD and real time tax. This simply isn’t the case for most businesses though. In a nutshell, if you’re already using a digital accounting programme, you should be fairly well set. You may have to make a few minimal changes to your accounting process along the lines of exporting your data to the MTD interface, but that’s pretty much it.
If you’re one of the many businesses that still operates on a ledger or on the “shoebox” system, in which you throw everything into a box and give it to your accountant at the end of the year, you will have to make some changes. That being said, they should be fairly simple. To use see your real time tax, you’ll need to upload your financial data into the MTD interface, which means that you’ll need to use some sort of digital accounting software. There are a lot of really simple options out there for you though, so this should be an easy transition — not to mention one that’s really good for your business.
Real time tax does not mean that your tax is automatically set aside for you.
Real time tax is simply an indicator, it’s not a system that puts your tax aside for you or differentiates it from your income like an employer might. While it’s certainly useful information (and it’s a good idea to be putting aside money for your taxes regularly), in the end it is just information. If you want to make the most of it, use it to determine how much you should be setting aside quarterly to meet your tax obligations, and then set up an automatic transfer to a separate bank account (such as a business savings account) for that amount.
What real time tax means for your business.
Ultimately, real time tax simply means that you’ll have a useful indicator of your business’s financial standing throughout the year. What you do with that information is up to you. You can use it to round out your financial planning, work it formally into your budget, or simply check in with it quarterly to get a sense of where things are going to stand at the end of the year. The information is going to be there regardless of whether you use it or not — but it’s simply common sense to get an idea of your tax obligations as the year progresses.
Like the rest of MTD, real time tax requires changes, but they’re changes that fall in line with good business practice, so why not start preparing for it now?
Remember, we’re always here to help. Whether you need help transferring your accounting to an easy to use digital programme or simply want the latest on MTD and what it means for your business, we’ve got a resource for you!
