Making Tax Digital or MTD is the government scheme to make recording information about your tax affairs and submitting it to HMRC easier and more efficient, resulting in fewer mistakes. While some aspects of MTD are already underway, other components such as phasing out anything other than digital self-assessment tax returns will be achieved in the future.
This means that manual records are out and digital records are in, and this has many implications for business. At present, most businesses, the self-employed and landlords are affected by these changes, and they should already be, keeping digital records using compatible software, or will need to do this in the near future.
The whole point of Making Tax Digital is to make it easier for businesses to keep on top of their tax affairs and get their tax right. So of course, it is in your interests to understand and embrace the new requirements…anything that makes tax less of a chore is to be welcomed, after all!
So, what do you need to know?
What are the benefits of Making Tax Digital?
• It will be easier for you to keep track of your tax affairs and submit information to HMRC in a timely manner
• Digital records mean less likelihood of errors, so generating millions of extra revenue that would otherwise be lost
• Software and apps will make it easy for you to generate invoices on the go which can be stored automatically.
• When you send HMRC a summary of your records, they can send you an estimate of the tax you owe, helping you to plan ahead.
• Real-time record keeping will mean you will be as up-to-date as possible with your paperwork.
Firstly, what has changed under Making Tax Digital?
• After 1 April 2019, you can no longer complete a paper VAT return, or submit your VAT return online at the HMRC VAT portal
• This means that you will have to keep records digitally and submit VAT records using compatible software
• Other changes will be introduced in the near future
What is Making Tax Digital for VAT?
The Making Tax Digital for VAT part of the scheme has already started.
This means that now any UK business above the VAT registration threshold (£85,000) must keep digital records and submit their VAT returns using compatible software.
This applies to most businesses with VAT periods starting on or after 1 April 2019. If your taxable turnover falls below the VAT threshold, you can still keep and submit your VAT records digitally on a voluntary basis.
Note that even if your taxable turnover falls below the threshold after 1 April, you will still need to continue with your digital records and returns.
If you are exempt from VAT or de-register, keeping and submitting digital records won’t apply.
Some types of businesses won’t need to join the scheme until 1 October 2019. These are as follows:
• Not for profit organisations that aren’t established as companies
• VAT divisions
• VAT groups
• Public sector organisations that have to provide additional information on their VAT returns (for example, NHS trusts)
• Local authorities
• Public corporations
• Traders whose base is abroad
• Bodies that have to make payments on account
• Annual accounting scheme users
What do I need to do to get ready for Making Tax Digital for VAT?
The first thing you need to do is to determine whether you are in one of the groups obliged to keep and submit digital VAT returns. The introduction above should give you a good idea of where you stand, and you may already have had some correspondence from HMRC on this. You can also double-check on the government’s Making Tax Digital pages.
So, as mentioned above, the vast majority of businesses will need to have already started keeping digital records for their VAT from 1 April 2019.
If you are in one of the organisations who can defer, you will need to start keeping your records and submitting your VAT returns digitally from 1 October 2019.
You will also need to set up your payment method. If you do not pay by direct debit, you will need to register 72 hours before your return is due. If you pay by direct debit, you will have to register at least seven working days before or five working days after your return is expected.
To make life simple, the due dates for your VAT returns stay the same, and you will need to submit the same number of returns as has previously been the case. So you will complete four if you submit quarterly, 12 for monthly returns and one for annual accounting.
You will also be supplying the same nine boxes of information as previously.
Who is exempt?
In certain circumstances, a business may be granted an exemption from having to keep records and submit their VAT returns digitally, for example, if you have a disability that prevents you from using computers or if you are going through insolvency proceedings.
If you think you are exempt, you will need to get in touch with HMRC who will assess your case on an individual basis.
What kind of software will I need?
While you may already be using accounting software, it’s important that the package you use for MTD is already compatible or can be updated to make it so.
There are lots of different software packages that are suitable, which you may already be using. You can check on the Making Tax Digital website.
Remember that if you use spreadsheets, you may need bridging software to enable you to submit your returns in the correct format. While there will be a “soft landing period” to allow businesses to copy and paste data as digital links for the first 12 months of the new regime, in the long-term you will not be allowed to simply retype information into an alternative package.
What information do I need to record?
You will only need to keep the usual VAT records, so you will need to include the time of supply or tax point, the supply’s value (which will be net excluding VAT) and the rate of VAT.
You’ll also include your business name and address, your VAT registration number and information about any VAT accounting plans you employ.
Don’t forget that you can also get an accountant, tax advisor or bookkeeper to keep your accounts and submit your returns on your behalf.
In terms of penalties, it’s also worth noting that HMRC will take a “light touch” approach to businesses during the first year of Making Tax Digital for VAT to allow people time to get used to the new system.
What is Making Tax Digital for Income Tax?
The Making Tax Digital for Income Tax pilot has been in place since March 2018, and sole traders and landlords can participate in it.
Because the government announced in March 2019 that it wouldn’t be mandating MTD for any new taxes or businesses in 2020, it remains as a pilot for now.
But it’s worth knowing about as it is should be rolled out at some point in the future. If you are eligible to take part in the pilot you can start enjoying the benefits now, and you won’t need to file a separate self-assessment tax return.
The main change will be that instead of submitting one tax return per year, you will provide HMRC with four smaller updates. At the year-end, you will have the chance to double-check the information HMRC has collated, submit a final report and also claim for allowances and reliefs. You will then get your final tax calculation.
You can see that this system of breaking down the task of submitting information around your income tax becomes will make the whole process more manageable and help you budget better.
It also means that you will have an estimate of the tax you will owe as you progress through the year rather than finding outright at the end, helping you to budget and plan accordingly.
You will also be able to send information more frequently than four times a year if you want more up-to-the-minute estimates of the tax you owe.
You will have the option to use an accounting period that runs in line with the tax year, or you can change your accounting quarters and period.
Just like Making Tax Digital for VAT, you will need to use MTD-compatible software to record your business transactions.
In the long-term, it looks likely that four payments on account per year will be required.
Deadlines you need to know
• 1 April 2019: eligible businesses will be required to keep and preserve VAT records digitally, submit returns to HMRC using compatible software and use the same to receive information back from HMRC
• 1 October 2019: organisations that have been exempt up to this point will now be subject to Making Tax Digital for VAT
• To be confirmed: Making Tax Digital will eventually be rolled out for income tax and corporation tax
The final word…
Remember that all the changes under Making Tax Digital are designed to make life simpler for both HMRC and businesses. So it’s really worthwhile getting up to speed on the requirements, and understanding how the new way of working can streamline your paperwork relating to tax, giving you peace of mind that your affairs are accurate and up-to-date, and freeing up your time to focus on your core business tasks.
To understand more about Making Tax Digital, go the government’s website where you will find plenty of information and guidelines to navigate you through these changing times. You can also contact us, and we’ll be happy to help you and talk about your business and Making Tax Digital.