Guide to Making Tax Digital
There has been much written in the press and online about Making Tax Digital (MTD) and yet in a recent survey over 40% of business owners said they didn’t know if and when it would impact their businesses.
In this paper I have set out – with as little jargon as possible – what MTD is, how and when it will affect UK businesses and what you should be doing now to prepare for it.
The launch of MTD means that businesses, and in due course individuals, will have to use compliant software to submit accurate financial information about their affairs to HMRC.
It is organised into the following sections:
1. What is Making Tax Digital?
2. What does ‘digital’ mean?
3. Does MTD apply to my business?
4. If so, what must I do and when?
5. What are my options?
6. Do I need bridging software?
7. Where can I get help?
8. Frequently asked questions.
What is Making Tax Digital?
HM Revenue & Customs (HMRC) is the body tasked with collecting taxes such as income tax, corporation tax and value added tax (VAT) in the UK. At present the systems for collecting these taxes are largely unconnected and rely on a combination of paper and online forms.
Where the forms are online, such as the forms for self-assessment of income tax and quarterly filing of VAT returns, the necessary information for completing the form is collected by the taxpayer or their accountant (called a tax agent by HMRC) and entered manually into the form which is then submitted online.
HMRC believe that these online systems are capable of being manipulated by taxpayers and are prone to error. Their solution is to have tax returns made online directly from a businesses’ accounting records which themselves must be held in a digital, ie computerised, form.
What does ‘digital’ mean?
Currently businesses keep their accounting records in a variety of forms. These include computerised accounting software systems (both desktop and cloud-based ), spreadsheets, manual books of account and files for storing bank statements, invoices, bills and receipts.
There are also two principal methods by which accounting information is processed (although HMRC do not explicitly recognise this): one method is by the business itself using its own staff or bookkeeper, and the other is by transferring the information, usually in the form of a spreadsheet or paper statements, invoices, bills and receipts to their bookkeeper or accountant to process on their behalf.
Under MTD all accounting information must be processed and held in a computerised (digital) form and submitted to HMRC directly from these digital files (called MTD compatible software) without manual intervention.
Does MTD apply to my business?
Making Tax Digital will eventually apply to every UK business (with very limited exceptions ) but is being introduced gradually, starting on 1st April 2019. When your business will have to file its tax returns digitally will depend on the size of your business (defined by turnover) and the type of tax.
The first tax returns that will have to be filed digitally, starting on 1st April 2019, are VAT returns. If you run a VAT-registered business with a taxable turnover above the VAT registration threshold (currently £85,000) you are required to keep digital VAT business records and send returns using Making Tax Digital (MTD)-compatible software (see below).
If your business is below the VAT threshold (currently £85,000) you will not be subject to MTD until 2020 at the earliest. If, despite the fact that your turnover is below the threshold you have registered voluntarily for VAT, then you still do not need to file your VAT under MTD although you may opt in voluntarily to do so.
For businesses that have more complex requirements, HMRC has made the decision to defer making it mandatory to file VAT returns digitally. This applies to those that fall into one of the following categories: trusts, not for profit organisations that are not set up as a company, VAT groups, NHS Trusts, local authorities, traders based overseas, those making payments on account and annual accounting scheme users. These businesses have until 1st October 2019 to start keeping records digitally and using MTD-compatible software to send their VAT returns to HMRC.
After MTD for VAT has been implemented, MTD for income tax (for the self-employed and those with income from property) and MTD for corporation tax are expected to follow, but not before April 2020 at the earliest. Early adoption is available for those businesses that wish to become compliant earlier than 2020 but it is likely that most businesses will wait for more detailed guidance about exactly what information is to be filed and how often before signing up.
If so, what must I do and when?
If you are registered for VAT and your taxable turnover is above the VAT registration threshold you must keep digital business records and send your VAT returns to HMRC using MTD-compatible software. For the vast majority of businesses this applies to accounting periods starting on or after 1 April 2019.
If your taxable turnover drops below the VAT registration threshold at any point after 1 April 2019 you are still required to continue to keep digital records and send HMRC your VAT returns using MTD-compatible software. This obligation doesn’t apply if you de-register from VAT or if you are exempt from MTD for VAT.
MTD does not require you to keep additional records for VAT, but to keep your existing records digitally, which means on compatible software or a spreadsheet, nor does it require more information to be submitted than is required by the current 9- box VAT return.
Your digital records should include, for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged. They should also include information about your business, including business name and business address, as well as your VAT registration number and details of any VAT accounting schemes you use.
MTD-compatible software is a software product or set of software products that between them support the MTD obligations of keeping digital records and exchanging your accounting information digitally with HMRC. If more than one application is being used, data that flows between those applications must also be exchanged digitally and not manually.
Digital records can be kept in a range of compatible digital formats. They do not all have to be held in the same place or on one piece of software. For example, a spreadsheet can be a component of digital record keeping provided the product that consolidates records, or summary records from the spreadsheet, can exchange data digitally with HMRC.
HMRC will give businesses until 31 March 2020 to make sure there are digital links between software products. Before that date, cut and paste will be an acceptable way to transfer information .
Details of the compatible software that is currently available is shown here: VAT and Income Tax products.
A spreadsheet can be used to calculate or summarise VAT transactions to arrive at the VAT return information you need to send HMRC, providing it is used in conjunction with a solution that can submit information to HMRC digitally.
If you use spreadsheets to keep business records, you’ll need MTD-compatible software so that you can send HMRC your VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD-compatible. You can read what we mean by ‘bridging software’ below. The information must not be physically re-typed into another software package.
What are my options?
Businesses that are required to submit VAT returns under MTD will, therefore, have the following options:
a. Use MTD compatible software, which will almost certainly be cloud based, to exchange your accounting information digitally with HMRC;
b. Use accounting software, which is likely to be desktop based, to transfer your accounting information to a software product such as bridging software to exchange your accounting information digitally with HMRC;
c. Use your spreadsheet to transfer your accounting information to a software product such as bridging software to exchange your accounting information digitally with HMRC;
d. Give your accounting records to your bookkeeper or accountant to do one of the above for you.
Do I need bridging software?
‘Bridging software’ is HMRC’s description of a digital tool that can take information from other applications, for example, a spreadsheet or an in-house bookkeeping system, and lets the user send the required information digitally to HMRC in the correct format.
You only need bridging software if you are going to file your VAT return yourself and your software is not MTD compatible or you use a spreadsheet. A number of software providers are currently writing bridging software in preparation for the 1st April 2019 deadline. If you are likely to choose this option then you should discuss this with your bookkeeper or accountant.
We will be issuing a report on suitable bridging software for MTD in early 2019.
Where can I get help?
Most bookkeepers and accountants have been preparing themselves and their clients for Making Tax Digital for some time, so it is quite likely that you are already aware of your obligations. If not we recommend that you contact us at firstname.lastname@example.org where you can request a free consultation to obtain advice on your options and best course of action.
Frequently asked questions
Making Tax Digital can be confusing; here are some frequently asked questions and the facts.
i. Can I still use spreadsheets? Well I think we’ve answered this – HMRC confused businesses by initially saying that spreadsheets would not be acceptable under MTD but this is no longer the case. Spreadsheets could contain complex calculations and adjustments needed to calculate the correct amount of VAT you owe.
ii. Will I have to submit the underlying accounting information with the VAT return? No, only the information in the 9 boxes is required.
iii. Will the HMRC online service remain beyond April 2019? Businesses over the VAT threshold will no longer be able to use the online service and will have to use MTD-compatible software but HMRC’s online service will remain open for businesses that are voluntarily registered for VAT and MTD exempt businesses.
iv. Will I need to show digital links from April 2019? A digital link is the digital transfer of information from one system to another. HMRC are allowing a 12-month grace period (called a soft-landing) where links between software products will not need to be digital, although information transferred to bridging software for the purpose of filing via an API will need to be digital from April 2019.
v. Which is the first return I have to file digitally after 1st April 2019? VAT registered businesses will transition to MTD on the first VAT return period that starts on or after 1st April 2019.
vi. Will HMRC provide an alternative solution via their website? They have always maintained that they will not be providing a solution for MTD and that third party software will have to be used.
vii. What if my turnover drops below the VAT threshold? Once you have transitioned to MTD you cannot go back to manual filing if you continue to be VAT registered.
viii. Can my bookkeeper or accountant file my VAT returns for me? Tax Agents can do this for a client as long as a 64-8 (Agent authorisation form) is in place and the relationship has been mapped across to the new Agent Services Account, which your bookkeeper or accountant will have to sign up for as this is not the same as their current Agent account.
ix. Will I automatically be enrolled for MTD if I am VAT registered? No, you will have to register, or your bookkeeper or accountant can do this for you, on HMRC’s website for MTD for VAT. It’s like the approach for self-assessment where the onus is on the taxpayer to inform HMRC that they meet the requirements for reporting their affairs.
x. Do zero-rated businesses have to use the new system? Yes, MTD applies to all VAT registered businesses over the VAT threshold. Zero-rated supplies are still VAT-able.