What is Making Tax Digital & when does it start?
The Government is currently introducing plans on Making Tax Digital (MTD) which will fundamentally change the administration of the UK tax system to bring it into the 21st century. MTD forms part of the governments’ plans to make it easier for businesses to get their tax right and keep on top of their affairs which aims to reduce the £8bn cost to the public purse due to avoidable error, through better use of information.
MTD was originally set to go live from April 2018, however, following concerns raised by the accountancy profession, businesses and parliamentary bodies, on 13 July 2017 the government announced a new timetable and changes to the implementation resulting in a delay to the launch of MTD. MTD will now take effect from 1 April 2019 for VAT purposes only for all businesses (unincorporated, companies, LLPs and charities) with turnover above the VAT threshold (currently £85,000). Businesses and landlords with turnover below the VAT threshold will now not be required to keep digital records, or to update HMRC quarterly, before April 2020. Despite the delay to the launch of MTD, the government remains committed to digitising the tax system but has confirmed that it will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest.
The following table summarises the changes:-
|Over £85,000 + VAT registered||VAT only||01 April 2019||01 April 2019|
|Over £85,000: all businesses/landlords||Income tax and national insurance (NI)||Not before April 2020*||06 April 2018|
|£10,000 to £85,000||Income tax and NI||Not before April 2020*||06 April 2019|
|All companies||Corporation tax||Not before April 2020||01 April 2020|
| * Or on a voluntary basis prior to April 2020.
The annual turnover of £85,000 above is based on the current VAT threshold.
MTD for VAT
Many tax payers already keep digital records however, under MTD from 1 April 2019 all VAT registered businesses with turnover above the VAT threshold will be required to:-
- maintain digital records, and
- Send their VAT information directly to HMRC using compatible software.
From 1 April 2019 VAT registered businesses will no longer be able to send their VAT information to HMRC via HMRC’s online portal.
VAT registered businesses will be required to maintain digital records and submit their VAT returns digitally with effect from the first VAT return period beginning on or after 1 April 2019.
The following exemptions that currently apply for electronic VAT filing will be extended to cover MTD for VAT:-
- Businesses run entirely by practising members of a religious society or order whose beliefs are incompatible with the use of electronic communications and the requirements for MTD.
- Businesses for whom online filing is not reasonably practicable for reasons of disability, age, remoteness of location, or any other reason.
- Insolvent businesses.
There will also be an automatic exemption for businesses registered for VAT but have turnover below the threshold.
The software must be capable of connecting to HMRC systems via an Application Programming Interface (API). The functions of the compatible software must include:-
- Keep records in a digital form.
- Preserve digital records in a digital form.
- Create a VAT return from the digital records.
- Provide HMRC with VAT data on a voluntary basis.
- Receive information from HMRC via the API platform.
We understand that no free software will be available for MTD for VAT, however, HMRC are working closely with software providers to ensure a range of suitable products will be available.
Businesses will be able to continue to use spreadsheets to record receipts and expenditure however, it will be necessary to link this digitally to compatible software to submit the VAT return to HMRC.
What action do you need to take now?
MTD is the biggest change to our tax system since self assessment was first introduced in 1996/97. It will therefore present challenges for all taxpayers, but particularly so for those who have always kept their records manually, and give their records to their accountant once a year.
Although HMRC has announced a deferral to the launch of (MTD), the government remains committed to digitising the tax system and the switch to digital accounts is therefore still going ahead. From at least April 2020, most businesses and landlords with turnover above £10,000 will potentially be required to use accounting software of some sort, and keep records in real time. In fact, many businesses are doing this already, and finding it easier than they first thought! Cloud-based systems offer the advantage of allowing the accountant to ‘log in’ to review how things are going throughout the year. Also, it is surprisingly inexpensive.
You will need to think about making arrangements for your accounting records so that they are ready for digital submission. This may be by simply contacting your current accounting software supplier to ensure your software is up to date. Suppliers continue to release information about these changes, so don’t delay. If you are not sure how you will make the submissions to HMRC, or you do not currently use any form of accounting package, please contact us to discuss your options.
How can we help you?
We have been working closely with HMRC and major software developers to discuss how we can make this easier for our clients, ensuring we have the solutions in place to make this transition as smoothly as possible for you.
We are already assisting many clients preparing and implementing systems to get them ready for the transition to Making Tax Digital. Contact a member of our Making Tax Digital team today to see how we can assist you.