What is Making Tax Digital?
Widely regarded as the biggest change to Taxation since PAYE was introduced in 1944, Making Tax Digital (MTD) is an ongoing, multi-year initiative by HMRC designed to improve and simplify the UK tax system, to make it more efficient and easier for businesses, and eventually individual & corporate tax payers, 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. This will allow you and your business to be better prepared, 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, providing fewer opportunities for errors, miscalculations and fraudulent activity and to streamline the process between businesses and HMRC, helping save valuable time.
The key tenets of the initiative involve:
Digital record keeping –ensuring that all business financial transactions are stored electronically.
Digital links – supporting digital links throughout your business, from source data to final figures.
Digital submissions – all submissions to be made digitally using HMRC approved software.
When is this happening?
The initiative is being implemented in stages with the first, being MTD for VAT beginning on 1st April 2019. This means that all VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) and whose tax quarter begins 1st April 2019 onwards, are required to comply with the Making Tax Digital regulations to keep records digitally and use HMRC compatible software to submit their VAT returns. It is expected that income and corporation tax will be introduced from 2020.
How will this affect my business?
At the end of the day, 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 simply by using accounting, ERP or book-keeping software applications, even spreadsheets are permissible and so the digital record keeping 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 own 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 will 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, but it is still worth checking with your software provider that the software version you are running will be fully MTD compliant or whether an upgrade or a workaround will be required for digital vat return submission.
What if my software isn’t compatible for submitting my VAT return?
If you’ve checked with your software provider and been informed 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.
Using Bridging software.
Like the name suggests, bridging software acts as a bridge between your own 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 own 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 tax reporting. Costs for these vary depending on requirements however annual subscriptions ( up to £250 p.a.) or charge per submission (£30) are fairly 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 would involve a registration process between you/agent and HMRC and will involve setting up a Government Gateway login. Note that this process may take up to 4 weeks or longer to complete.
Develop your own interface.
HMRC uses the API (Application Programming Interface) platform to share data between systems and applications and by request can provide your own software developers with suitable API platforms to build into your own software.
Does MTD apply to all businesses that pay VAT?
Not quite – there are a few groups that are exempt.
The ‘digitally excluded’ – those that cannot keep digital records for reasons such as age, disability and remoteness of location. Those who cannot interact with digital technology for religious reasons are also exempt.
Certain types of businesses have also been given 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.
VAT will continue to be paid quarterly, and income tax paid in three instalments (Jan/July and following Jan)
Corporation tax is paid in quarterly instalments by large companies already. Small companies can pay when their tax return is submitted.
Companies with profits of over £20m will be required to pay their corporation tax instalments earlier, from 1st April 2019.
What about MTD 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 – has been reconsidered and won’t be introduced before April 2020, at the earliest.
What happens if I don’t comply with MTD?
Like the current system, if a business doesn’t submit its MTD Vat return on time it will be issued with a penalty whereby the HMRC will keep a close eye on your business for the next 12 months to make sure you don’t forget to submit.
If you fail to submit more than once in that 12-month period, you’ll receive a penalty notice (at present). What will change, is that the system will now assign penalty points instead. When you’ve collected several penalty points (this number hasn’t been disclosed yet), a financial penalty will be issued.
This new penalty points system will not be applied until at least 2020.
How is HMRC helping businesses prepare for MTD?
The UK Government has published several articles, a white paper and explanatory videos, all aimed at 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). Some useful hyperlinks are listed below.