Making Tax Digital will transform HMRC into a world leading digital tax authority
The new Making Tax Digital initiative from HMRC requires online tax filing and payment, as well as digital record keeping.
The aim is to reduce tax errors and generate an extra £610 million for the treasury by 2021 however the impact is likely to be significant for every UK business be they large or small. By automating tax record submissions, MTD will assist businesses in managing their tax affairs by alerting them before payment is due and keeping them on top of their tax liability. This will prevent payments from piling up and reduces the chance of error and incurring penalties.
What Making Tax Digital means for your business
From April 2019, if you are a VAT registered business you will need to use software to record all your VAT invoices and receipts. If you are currently below the £85k turnover threshold and therefore not VAT registered, then full digital record keeping is optional.
In a nutshell this means that if you submit your VAT Return manually through the post or online (using the existing Government Gateway tool), you will have to integrate commercial accounting software into your business before April 2019 as these forms of submissions will no longer be accepted by HMRC.
HMRC’s latest draft Making Tax Digital VAT notice states that whilst the complete set of digital records to meet MTD requirements do not all have to held be in one place or program, there must be a digital link between the pieces of software used. Once finalised this section of the draft VAT notice will be given force of law and will therefore be a mandatory requirement. The rule applies to VAT periods starting on or after 1 April 2019.
For businesses needing to use digital software for the first time, there are a number of providers who offer this on a subscription basis with various packages tailored to your company’s size and structure. Businesses that already use accounting software will have to check with their current provider that the solution is MTD ready.
There are a few exceptions outlined in the draft VAT notice:
- The business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (e.g. those religious beliefs prevent them from using computers).
- It is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason.
- If you are subject to an insolvency procedure. In this case businesses should contact the VAT Helpline to discuss alternative arrangements.
The new legislation requires you to keep records in an MTD compliant manner.
For each supply you make:
- Business name
- Address of your principle place of business
- VAT registration number
- A record of any VAT accounting schemes used
- The time of supply
- The value of the supply
- The rate of VAT charged
For each supply you receive:
- The time of supply
- The value of the supply including any VAT that is not claimable
- The amount of input tax that you will claim
Your VAT account must include:
- The output tax due on sales
- The output tax due on acquisitions from other EU member states
- The tax payable on behalf of your supplier under a reverse charge procedure
- The tax that needs to be paid following a correction or error adjustment
- The input tax claimable from business purchases
- The input tax allowable on acquisitions from other EU member states
- The tax reclaimable following a correction or error adjustment
- Any other necessary adjustment required by VAT rules
If you currently use Microsoft Excel to record your sales and purchase transactions, although a spreadsheet is a valid digital record, you will need to ensure that this is either API enabled (can submit your VAT return to HMRC via an API link) or it has a digital link to another MTD enabled software. Broadly speaking, a digital link allows data to be imported/ exported between programs without the need for manual intervention.
MTD goes lives on the 1st April 2019. There is no general ‘soft landing’ period. You will have to register with HMRC within 30 days of reaching the £85k threshold. Failure to comply with MTD will incur penalties. The specific details of how the penalty regime for MTD will work is currently under consultation and options include a points-based penalty system where an accumulation of points will incur a monetary charge.
However, businesses which hold their digital records in more than one system, the requirement to have these system digitally linked will not be mandated until April 2020 to allow those businesses extra time to update legacy systems to be fully compliant. This ‘soft landing’ period will waive any penalties for non-compliance.