What exactly is Making Tax Digital (MTD)? Well it is a key part of the Government’s plans to make it easier for businesses to get their tax right and keep on top of their tax affairs.
Keeping digital records and providing updates to HM Revenue & Customs (HMRC) directly will help reduce errors, cost, uncertainty and worry. Whether you agree with this is another matter!Download Free MTD Guide
In essence, ‘Making Tax Digital’ is designed to get all tax records online and up to date, so they are accessible to both taxpayers and HMRC. Quarterly submissions of accounts will then be made to HMRC to give a snapshot of business income and expenses.
As part of MTD, businesses registered for VAT with a taxable turnover above the VAT registration threshold of £85,000, will need to keep VAT records digitally and file their VAT returns using MTD compatible software. This will start from their first VAT period starting on or after 1 April 2019. For example, if your business submits VAT returns for calendar quarters, you will need to comply with the MTD rules for the period ending 30 June 2019 onwards.
For any return commencing on or after 1 April, 2019 you will no longer be permitted to submit your VAT return through your government gateway account. Instead, you must use software which is able to communicate with HMRC via an Application Programming Interface (API).
This applies to sole traders, partnerships limited companies, charities and any other VAT registered entity whether UK resident or established overseas. Those on the annual accounting scheme will come into MTD on the start of the first annual accounting period starting after 1 April 2019.
Businesses with a taxable turnover below the VAT threshold will not have to operate MTD, but can still choose to do so voluntarily. Business will not have to keep » digital records or report quarterly for other taxes (e.g. income tax and corporation tax) until April 2020 at the earliest.
You already file VAT returns quarterly, so what is the difference?
At present, VAT returns are submitted with information contained in Boxes 1 to 9; there is no underlying information submitted to HMRC to support those figures. After MTD, the underlying details will be available to HMRC in digital format, which will enable them to scrutinise the data in a way that has never been possible before.
A business within the scope of MTD must 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 software will allow the organisation to maintain digital business records and file relevant VAT information electronically.
Our understanding is that there will eventually be three different types of MTD compliant software:
- Software packages that can be used to keep digital records and file returns via HMRC’s API e.g. Xero, FreeAgent
- API enabled spreadsheets – spreadsheets with an inbuilt function allowing them to file returns via HMRC’s API.
- Bridging software which can take return information from an existing spreadsheet and submit this to HMRC via their API.
A spreadsheet on its own will not qualify as MTD compliant. Where a spreadsheet is used the relevant data must be digitally transmitted from the spreadsheet or other source where the digital records are kept, directly to HMRC.
The summary information for completion of the VAT return must not be physically re-typed into another software package. Submission dates and payment dates of VAT will not change.
What is considered ‘functional compatible software’ for Making Tax Digital?
HMRC has stated that ‘functional compatible software’ is a software programme that must be able to:
- Record and preserve records in an electronic format;
- Provide to HMRC information and returns from the electronic records in an electronic format using the Application Programming Interface (API) platform and;
- Receive information from HMRC.
For each supply you make you must be able to record;
- The time of supply;
- The value of the supply and;
- The rate of VAT charged.
You must also have a record of the outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.
For each supply you receive you must be able to record;
- The time of supply;
- The value of the supply including any VAT that is not claimable by you;
- The amount of input tax that you will claim and;
- If more than one supply is on an invoice you can record the totals from the invoice.
The minimum data you will be required to keep digitally will include invoice date, invoice value, income or expense categoryand deducted amount / percentage for expenses. VAT returns submitted under the MTD rules will need to include a much wider range of information than currently required.
Additionally, the new rules will include a facility to submit supplementary data to HMRC, for example, additional information in support of a VAT repayment return.
The expectation is that improving access to data will speed up the returns system, allowing HMRC to process VAT refunds and deal with other queries faster and more efficiently.
Will there be penalties if I do not file a VAT return using MTD?
HMRC has confirmed that the penalties for failure to keep digital records will come into force immediately from April 2019, while there will be a grace period for those who file late. Penalties for late filing will come into force in April 2020.
What do I need to do to get ready for MTD?
If you currently prepare your VAT returns by hand or on computer spreadsheet you will need to make changes.
Morris & Co has long recognised that our clients require differing levels of service and involvements from us. Making Tax Digital is no different and therefore we have put together three different solutions to help you satisfy the requirements.
The options are:
- You or your bookkeeper use Making Tax Digital compliant software to record your transactions and you self-manage your Making Tax Digital requirements.
- Morris & Co can provide training on cloud based software such as Xero, FreeAgent or SAGE One to help you get up and running with the software in order for you to self-manage your Making Tax Digital requirements.
- Morris & Co can carry out your bookkeeping and fulfil your Making Tax Digital requirements.
MTD for VAT is now less than a year away, meaning that any VAT registered businesses that stand to be affected should seek specialist advice as soon as possible in order to ensure they are fully prepared.
To discuss your particular situation please contact either Desirie Lea on 0151 348 8400 or email email@example.com