Making Tax Digital

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 and is aimed to reduce the £8bn cost to the public purse due to avoidable error, through better use of information.

Following concerns raised by the accountancy profession, businesses and parliamentary bodies the government recently announced a new timetable and changes to the implementation resulting in a delay to the launch of MTD. MTD will now take effect from April 2019 only for businesses with turnover above the VAT threshold (currently £85,000) and for VAT purposes only. Businesses and landlords with turnover below the VAT threshold will not be required to keep digital records, or to update HMRC quarterly, before April 2020. MTD was originally set to go live from April 2018. 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:-

Annual turnover

Quarterly tax reports

New timeline

Old timeline

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.

 

Many tax payers already keep digital records however, under MTD there will be an additional requirement in that, they will be required to submit an update to HMRC every three months. At the moment HMRC are not going to ask tax payers to make quarterly payments unless they choose to do so voluntarily.

Taxpayers will have at least 12 months to become familiar with the changes before any late submission penalties will be applied.

What do you need to do?

Use accounting software or apps to keep your business records and provide quarterly updates of information to HMRC. These three monthly uploads will not be accounts as such, and will not need to include such things as stock valuations or tax adjustments. Furthermore, businesses that are currently eligible for three line account reporting (i.e. those below the VAT threshold) will be able to submit a quarterly update with only three lines of data (income, expenses and profit). Submission of quarterly updates will be required one month after each quarter end.

HMRC have confirmed that businesses and landlords will have ten months after their last quarter or until the current self-assessment deadline of 31 January (whichever is sooner) to finalise their year end activity.

Businesses will be able to continue to use spreadsheets to record receipts and expenditure, which they can then link to software to automatically generate and send their updates to HMRC.

HMRC has confirmed that free software will be available to the majority of the smallest businesses however, that they will not be providing this. Free software will instead be provided by software providers, although we don’t yet know which software providers will be providing this or how the smallest of businesses is defined.

Who is exempt?

There will be few exemptions from MTD for businesses. The new timetable and changes to the implementation to MTD announced by the government on 13 July 2017 did not include any changes to those exempt from MTD. The following therefore currently remain exempt from the requirement to keep digital records:

  • Businesses and landlords with turnover under £10,000
  • Charities (but not their trading subsidiaries)
  • Community Amateur Sports Clubs (CASCs)
  • Those who “cannot engage digitally” (religious society, disability, age, remoteness of location)

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 now, 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.

Useful Links

HMRC Summary of Consultation Responses

Xero

Sage Solutions

Quickbooks

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