Making Tax Digital - All You need to Know
Why HMRC took the initiative of making tax digital (MTD)?
Making Tax Digital (MTD) is the UK government’s initiative to revamp the entire UK tax system and ultimately make HMRC the most technically advanced and most comfortable to comply taxation system in the world.
By 2020, HMRC aims to digitize the entire tax system and make the administration of taxes simple, effective and efficient. MTD will put an end to self-assessment and make audits simple. As the system matures, inspections will be automatic and system driven, completely removing the dependence on a human.
MTD applies to a range of taxpayers both businesses and professionals. This new and improved process will require all the business owners to maintain digital records using compatible software. So, if you run a company with a taxable turnover above the VAT registration threshold (currently £85,000), you are required to keep business records and send returns using Making Tax Digital (MTD)-compatible software. More than 95% of businesses will need to do this for VAT periods starting on or after 1 April 2019. Firms with a taxable turnover below the VAT threshold can also sign up voluntarily for MTD VAT.
HMRC has been working hard to make sure the implementation is seamless. HMRC has been working with the developer community to pilot MTD VAT from April 2018 and is now open to VAT businesses and their agents mandated to use the service from April 2019.
A business, commercial software provider or an agent can join the pilot now and help HMRC proactively by providing feedback as it continues to evolve.
In case you seek service of agent for VAT compliance, now is the time to speak to them and find out when it may be best for you to join the pilot. It’s crucial that you have the right VAT digital software package. Also, if you already use accounting or record keeping software, you should speak to your software service provider to find out when it will update for MTD.
Is MTD VAT compliance mandatory for your business?
Yes, provided you register for VAT, and your taxable turnover is above the VAT registration threshold (currently £85,000). With the implementation of MTD, you must keep a digital record of all business transactions and submit your VAT returns to HMRC using MTD compliant VAT software. As noted above, for more than 95% of businesses this applies to account periods starting on or after 1 April 2019.
Please note, even 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 a commercial, personal or free VAT software compatible with MTD. However, this obligation doesn’t apply if you completely de-register from VAT or if you are exempt from MTD for VAT in the first place.
My taxable VAT turnover is below the VAT MTD threshold, should I comply?
In case your business has a taxable turnover below the VAT threshold you can still sign up for MTD voluntarily. HMRC is encouraging businesses with a taxable turnover below the VAT threshold to sign up so they can also benefit from MTD.
Keeping the digital record in a Software will help you stay on top of business record keeping, allowing you (and your agent, if you have one) to understand better how your business is performing.
Is MTD VAT compliance deferred for a few businesses?
Yes, HMRC has decided to defer mandate for six months for a small minority of businesses that have more complex requirements. Such companies have until 1 October 2019 to start keeping records digitally and using MTD-compatible software to send their VAT returns to HMRC. Here is the list:
- Trusts & ‘not for profit’organizations that are not set up as a company
- VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, municipal corporations
- Traders based overseas, those required to make payments on account and annual accounting scheme users
Are given an additional six months to prepare and to ensure there is sufficient time for testing the service with them in the pilot before they are mandated to join MTD.
What should I do, to be MTD ready?
If you don’t currently use software, or your software won’t be MTD-compatible, you’ll need to find an alternative solution that is compatible with MTD. Once you have the tool, you will need to keep your business records digitally from the start of your accounting period.
If you already use software to keep your business records, check your software provider’s plans to introduce MTD-compatible software.
I use spreadsheets to maintain the record of all the transactions, can I continue to use it?
Yes, provided you use a bridging software that connects your spread-sheet to HMRC via the API. Connection to HMRC is required to submit VAT returns to and also receive information back from HMRC. Please note, the bridging software cannot be the one that needs you to physically re-type the VAT form details into another software package.
What information needs to be digital in MTD software?
Your digital records should include, for each supply, the time of supply, 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 principal business address, as well as your VAT registration number and details of any VAT accounting schemes you use.
What is HMRC’s definition of MTD-compatible software?
"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 data digitally with HMRC through the MTD service. If more than one application is being used, data that flows between those applications must also be exchanged digitally.
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 VAT software."
HMRC will allow 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.
The exception to this is where return information is to be transferred to a software product (the bridging software) enabled for API and designed to submit the 9-box VAT return . In those circumstances, the transfer of information must only be digital.
What is a bridging software?
‘Bridging software’ is HMRC’s description of the digital tool that can take information from other applications, for example, a spreadsheet or an in-house record keeping system, and lets the user send the required information digitally to HMRC in the correct format.