As of 1st April 2019, all businesses with a taxable turnover above the VAT Threshold will be required by law to use the Making Tax Digital service to keep their records digitally. This will mean the utilisation of software to submit their returns.
The government is determined to become a global leader in digital tax administration, and while it’s a colossal challenge with varying impact on businesses, there can be little doubt that in the long term this is a good thing for business and a good thing for the government.
1. Up to date financials boosts buyer confidence
Having been involved in literally thousands of business sales, from one-person operations through to corporates, there is a consistent theme in which businesses sell for the best price and in the shortest time; those with well prepared and clean financial detail.
The Making Tax Digital initiative will have a positive impact on future business owners looking to exit their venture. Currently, the single biggest reason a buyer does not pursue a business to completion is due to the often-fractious nature of a target business’ financial record keeping and making tax digital deadlines.
Too many small businesses still rely on paperwork and excel to manage their financials. Often a last-minute dash to the accountant with their records once a year means there is rarely a clean snapshot of the business’ performance other than at this one occasion – which in turn means a buyer is left waiting for information to perform the due diligence required prior to purchasing a business.
Making Tax Digital should ensure that most businesses are forced into maintaining their bookkeeping, which in turn will make due diligence much easier and quicker for buyers.
2. With clean financials comes easier borrowing
Once a business buyer has done their own due diligence on an opportunity, often the next hurdle to overcome is funding the venture.
Over recent years, there have been some significant advances in commercial lending opportunities, in particular a move away from high street banks. This includes very tailored experiences through platforms such as FundingOptions, or online lenders such as iwoca, as well as a big increase in the popularity of crowdfunding for even the smallest of ventures.
Once a buyer has made the move to buy a business, the biggest reason for a deal breakdown is the lack of funding available. This isn’t always because a lender doesn’t want to lend, more often it’s down to the lack of quality financial information being available at a particular point in time. Making Tax Digital will ensure that most businesses have better kept financials, which are up to date and should ultimately make funding of these ventures far easier.
3. Less mistakes, more buyer confidence
When selling a small business in particular, it’s not acceptable to simply pull a profit and loss from your accounting software at any point in time and declare this as a true picture. When buyers perform due diligence on your financials, they will be put off by any errors which affect the reality of the trading position.
With Making Tax Digital, business owners will be far more likely to keep clean and up to date records, which carry less errors or mistakes that are often cleaned up at year end. There is nothing more perturbing for a business buyer than looking through financials and finding mistakes or gaps that while easily explained, shouldn’t exist.
For many business owners, the introduction of Making Tax Digital brings with it an element of further red tape and challenge, but it will, undoubtedly, also offer some incentives. In particular, forcing business owners to unknowingly contribute towards their future successful exit, even if they are not even considering it.
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