What is Making Tax Digital?

An initiative regarded as the most significant change to Taxation since the introduction of PAYE in 1944. Making Tax Digital (MTD) is an ongoing, multi-year initiative by HMRC designed to improve and simplify the UK tax system. The initiative aims to make it more efficient and easier for businesses, and eventually individual & corporate taxpayers, to share information with HMRC and have greater visibility on their tax affairs.

Essentially MTD is about creating a link between your financial records and the tax calculation system. MTD will allow you and your business to better prepare, by having an idea of how much money you’ll need to set aside for tax.

The aim is to make tax recording more accurate and allow fewer opportunities for errors, miscalculations and fraudulent activity. Also, to streamline the process between businesses and HMRC, helping save valuable time.

The fundamental tenets of the initiative involve:

  • Ensure that all business financial transactions are stored electronically – Digital record-keeping
  • Supporting digital links throughout your business, from source data to final figures – Digital links
  • All submissions to be made digitally using HMRC approved software – Digital submissions

When is this happening?

The initiative is coming in stages with the first, being MTD for VAT beginning on 1st April 2019. After this date, all VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) and whose tax quarter begins 1st April 2019 onwards, must comply with the Making Tax Digital regulations to keep records digitally and use HMRC compatible software to submit their VAT returns. We aren’t expecting the introduction of income and corporation tax until 2020.

How will this affect my business?

Depending on the size and nature of your business, maybe not as much as you might think.

The vast majority of UK businesses already keep digital financial records by merely using accounting, ERP or book-keeping software applications, even spreadsheets are permissible, and so the digital recordkeeping requirement will mainly impact smaller businesses or those who still use paper-based processes. These will have to transition to keeping records electronically to comply with the new regulations.

The digital submissions requirement is perhaps where there is most confusion, and it is worthwhile for every business to check their readiness in this area.
From April 1st 2019, HMRC will only accept digitally submitted vat returns made by functionally compatible software. The paper-based and online tax return service is to be phased out.

How can I check if my software is compliant?

Firstly, if you use a software application for your accounting and record-keeping, check with your software provider. Since this is a change to UK tax regulations, most ERP and accounting software providers, large and small, in the UK marketplace will be prepared for, or in preparation for these changes. It is still worth checking with your software provider that the software version you are running is entirely MTD compliant or whether you require an upgrade or a workaround for digital vat return submission.

What if my software isn’t compatible with submitting my VAT return?

If you’ve checked with your software provider and they inform you that your software isn’t compatible for submitting your vat return, then there are other alternatives to consider depending on the complexity of your business tax requirements.

I am using Bridging software.

Like the name suggests, bridging software acts as a bridge between your business software and HMRC. It could be in the form of a simple Add-In for Excel or a software package or web-based application. The bridging software will read the tax details from your software application and submit your tax return to HMRC in the proper format. Depending on the bridging application used, it may be a simple one-way submission from you to HMRC or the software may provide additional features in terms of a tax report. Costs for these vary depending on requirements however annual subscriptions (up to £250 p.a.) or charge per submission (£30) are relatively common.

Using an Agency.

There are many registered agents and accountants who, for a fee, will handle your VAT affairs and submit returns on your behalf. This process would involve a registration process between you/agent and HMRC and will include setting up a Government Gateway login. Note that this process may take up to 4 weeks or longer to complete.

Develop your interface.

HMRC uses the API (Application Programming Interface) platform to share data between systems and applications. By request, HMRC can provide your software developers with suitable API platforms to build into your software.

Does Making Tax Digital apply to all businesses that pay VAT?

Not entirely – there are a few groups exempt. The ‘digitally excluded’ are those that cannot keep digital records for reasons such as age, disability and remoteness of the location — also, those who cannot interact with digital technology for religious reasons. Certain types of businesses have a 6-month deferral, to October 2019 – some trusts and charities, for example.

Will I need to change how I pay my VAT bill?

HMRC has said there are no plans for changing the payment dates for taxes reported under MTD. The VAT to be paid quarterly, and income tax paid in three instalments (January/July and following January). Large companies pay Corporation tax in quarterly payments already. Small companies can pay when they submit their tax return. If your company has profits of over £20m, corporation tax instalments must be paid earlier, from 1st April 2019.

What about Making Tax Digital for income and corporation tax?

The timetable for introducing MTD on further taxes – including Corporation Tax for limited companies, as well as Income Tax and National Insurance for sole traders – is being reconsidered and won’t come into play before April 2020, at the earliest.

What happens if I don’t comply with Making Tax Digital?

Like the current system, if a business doesn’t submit its MTD Vat return on time, a penalty will be issued. HMRC will keep a close eye on your business for the next 12 months, ensuring you don’t forget to submit.

If you fail to submit more than once in those 12 months, you’ll receive a penalty notice (at present). What will change, is that the system will now assign penalty points instead. Once you collect several penalty points (specific number remains unknown), HMRC will issue a financial penalty. This new penalty points system won’t apply until at least 2020.

How is HMRC helping businesses prepare for Making Tax Digital?

The UK Government has published several articles, a white paper and informative videos, helping businesses understand what it all means. The most recently updated and comprehensive information (as of 12th February 2019), can be found at gov.uk (making tax digital).

Overview of Making Tax Digital

Making Tax Digital for VAT

HMRC – Help & Support

Find software suppliers for sending VAT Returns and Income Tax updates