Making Tax Digital (MTD) is changing the way you need to interact with HMRC. The subject can be quite confusing and so we’ve created a video to explain the main points. We aim to help you get up to speed with the changes in good time:
VAT-registered businesses are the first to be affected by MTD
Since April 2019, businesses who have a turnover above the VAT threshold, currently £85,000, are required to register for digital VAT filing and submit quarterly VAT returns online using the Making Tax Digital for Business (MTD) system, in order to meet their VAT obligations.
Smaller businesses are not yet required to use the system, although they can choose to do so voluntarily. MTD will be mandatory for all businesses from 1 April 2022.
Businesses who use online accounting to comply with MTD find it improves efficiency, boosts profitability and made the transition as painless as possible.
Businesses that currently keep their records in a cashbook, spreadsheet or non-MTD-compliant software must monitor their turnover. They will need to make changes as their ability to login to HMRC’s website and key-in the VAT return figures will be removed once their annual turnover exceeds £85,000.
Going digital: who and when?
What the proposals mean in practice is that businesses operating above the VAT threshold have to now use a form of digital record keeping, and have to submit VAT return information to HMRC via MTD-compatible software.
The requirements will remain in place even if such businesses subsequently fall below the VAT threshold, ceasing only on deregistration.
Digital record keeping became mandatory from 1 April 2019, and submission of VAT returns became digital for return periods starting on or after 1 April 2019. When MTD was first proposed, the idea had been to align VAT and income tax submissions. For now at least, there is to be no change to the VAT return or payment dates.
The government has said that it won’t expand Making Tax Digital beyond VAT until the system has been shown to work.
As regards income tax, the government has said that keeping digital records and providing quarterly updates will become mandatory for self-employed businesses and landlords with income over £10,000 from 6 April 2023. It is possible to start using the MTD regime voluntarily earlier than this.
What are the business benefits of Making Tax Digital?
Having an online tax account that you can access at any time, means you will be able to see what information HMRC already holds on your business. As a result, you won’t waste time re-submitting it. You will also be able to check your details are correct and up-to-date at any time. Business owners will also be able to access more-tailored services.
You will no longer have to wait until the end of the year to find out how much tax you owe. With a digitalised tax system, HMRC will collect and process tax information in real-time. This therfore helps prevent errors and stop ‘tax due’ or ‘repayments owed’ building up.
Much like the online account you have for your personal bank account, by 2020, you will be able to view your liabilities and entitlements as a single financial account.
You will be able to contact HMRC on its website via webchat and secure messaging. In addition, you will be able to receive and send data via whatever payment software you use, and interact with HMRC at a time convenient to you.
Making Tax Digital for Business software
Under the new MTD rules, businesses have to use ‘functional compatible software’. This means a ‘software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)’. This must be capable of:
- keeping records in digital form as specified by the new rules
- preserving digital records in digital form
- creating a VAT return from the digital records held in compatible software and submitting this data to HMRC digitally
- providing HMRC with VAT data on a voluntary basis
- receiving, via the API platform, information from HMRC to ascertain compliance. It is as yet unclear what this means, but it may relate to HMRC’s ability to send compliance prompts and nudges
Use of spreadsheets
Many businesses use spreadsheets for their bookkeeping. Businesses using spreadsheets for VAT need add-on ‘bridging’ software to comply with the MTD requirements if they don’t want to move to full accounting software.
A list of approved bridging software solutions is available on the HMRC MTD website. Alternatively, we offer a filing-only MTD service for clients who wish to continue to use spreadsheets themselves.
Helping with the challenges
Whatever the size of your business, there is a time of great change ahead, and we are on hand to help with the challenges.
There are issues that VAT-registered businesses would do well to consider now. One key area is whether business transactions are currently recorded digitally. If they are not, consideration should be given to recording some/all transactions on a digital basis.
Burton Sweet are available to advise on the systems available – we are experts in Xero, Sage and QuickBooks.
We would be happy to help you with any issues arising from Making Tax Digital. We would also be able to undertake bookkeeping services for you to enable you to comply with the requirements. As further details about Making Tax Digital emerge from HMRC, we will of course continue to keep you up-to-date.
Please contact Nigel Harris, our MTD adviser to discuss in more detail.