The government is looking to make the taxation system fit for the 21st Century by increasingly digitising the process of collecting and storing tax information and submitting returns. This is all part of what is called Making Tax Digital or MTD, and it will have a significant effect on businesses in the UK. In this post we answer your most frequently asked questions about making tax digital.
1. What is making tax digital for business?
Making Tax Digital is a government initiative aimed at modernising the current tax system so that it is more efficient and ‘customer friendly’. This will involve using MTD to calculate and manage your taxes.
Every business owner and individual taxpayer already has a digital account through which they can manage all their tax liabilities at the same time, in the same place so this is a development of that framework.
2. Who does making tax digital apply to?
MTD will eventually apply to all elements of the tax system, as it applies to both individuals and businesses. VAT is the first area to see changes. After that, the MTD process will be rolled to other areas of taxation, MTD for income tax, followed by MTD for corporation tax at a later date.
3. Who is exempt from making tax digital?
You may be exempt from MTD if, for instance, you can show you are unable to use accounting software or apps that are part of this digitisation process, perhaps because of religious beliefs or a disability, or because you are in a remote location which may not be connected to the internet.
These exemptions are the same as the current exemptions for VAT online filing. Additionally, when MTD for income tax comes into effect there may be an exemption for those with a very small turnover. However, the level of this exemption has not been set.
Tax authorities say they will consider exemptions on a ‘case-by-case basis’.
4. When will MTD for business come into effect?
MTD for VAT will become mandatory in 1 April 2019. So, as of April 2019, if the VATable turnover of your business is above the VAT threshold, which is currently set at £85,000, MTD will have an impact on how you submit your VAT returns.
If you are a VAT-registered business but currently below the threshold you should still monitor your annual turnover as if it increase you will be required to comply with MTD for VAT rules.
Making tax digital timeline
April 2019: VAT-registered businesses with taxable turnover in excess of £85,000 need to start maintaining digital records. VAT-registered businesses below the threshold can continue as usual but can use the system if they choose to.
April 2020: VAT registered businesses with taxable turnover below the VAT threshold of £85,000 need to start maintaining digital records.
Beyond April 2020:
Making tax digital for Income Tax (self-employed, partnerships, trusts and landlords who compete self assessment tax returns) will become mandatory but not before April 2020. MTD for income tax has an open pilot currently. If you’re a sole trade with income from one business or rent our UK property you can sign up for the MTD pilot here.
Making tax digital for corporation tax (limited companies): MTD for corporation tax not been confirmed yet. HMRC has stated that it will not widen the scope of Making Tax Digital beyond VAT before the system has been shown to work, and not before April 2020 at the earliest. We will keep you updated as information becomes available.
5. How will making tax digital affect my business?
You will have to submit your VAT returns using software rather than doing so through the HMRC website. Current online tax return services will be withdrawn if you fall within the scope of MTD rules.
This means you won’t be able to continue using a manual system to manage your VAT. You may be able to continue using a spreadsheet, but you will need to combine it with what’s called ‘bridging software’ that allows data to digitally link your spreadsheet with HMRC’s systems.
If you are using accounting software already, then it may already be MTD-compatible. If it is, then probably all you will have to do is start using features you haven’t previously needed to use. If you have a cloud-based accounting software package, this should update itself so it is automatically MTD-compliant.
If you are using older accounting software, you will probably have to switch your bookkeeping to other software as it is unlikely to be able to properly communicate or work with HMRC’s own systems.
HMRC won’t be providing any software itself, so you will have to get this from a third-party supplier. HMRC have a list of software providers who are developing MTD-compatible software. We can help you identify the software that will be best for your business.
With MTD for VAT, you can continue to issue paper-based invoices, but at some point, you will need to transfer at least some of the data on them over to your MTD for VAT software. You cannot just input monthly invoice totals into the software.
With the MTD deadline looming, it makes sense to switch to MTD sooner rather than later, particularly if you are having to make widespread changes to your internal tax and business practices to accommodate MTD. That will give you, your accountant and your software supplier more time to sort out any concerns and complications that may arise.
By doing so, you will also avoid the inevitable congestion that will arise when businesses who have left things late all try and switch to MTD at the last minute.
Under the new Making Tax Digital regime, you will have to report quarterly. There will be a requirement to submit VAT returns and income tax updates to HMRC quarterly and annually directly from software. You will not just have to file your VAT return more frequently, but also use ‘digital record keeping’ to store at least some of your VAT information.
6. What are the benefits of making tax digital?
Making Tax Digital should give you a much clearer and more accurate picture of your tax affairs than you have ever had before. Because calculations will be done on an ongoing basis, you should have a snapshot in real-time of how much tax you owe at any one time. This should make it much easier to plan and budget for tax payments which means that you won’t have to wait until the end of the tax year.
Having all your tax information in one place online should also streamline the whole process of interacting with HMRC, making it faster and requiring less effort.
7. What are the making tax digital penalties?
Under MTD, HMRC has confirmed that it plans to apply a points-based penalty system to late submissions and payments because this is comparatively simple to understand and to apply. If, when added up, the number of penalty points is higher than the allowable limit, a financial penalty will be incurred. Businesses will be able to appeal if they get penalty points, but only if they have a reasonable excuse for doing so.
The penalty points will have a shelf life, so they will drop off if there are no more late payments or submission problems. Because businesses are able to see how many points they have incurred already, it’s hoped businesses will change their behaviour to avoid incurring more in future. This new system of penalty points for late VAT returns won’t come into force until 2020.
What do I need to do now?
If you need help transitioning to MTD, our London accountants and tax experts are ready to help you make the transition to digitalisation much smoother and less stressful for your business.
We may consider the possibility of exclusion exemption. We will check to see if your accounting software needs to be upgraded or help you acquire a package compliant with MTD. If you’re using spreadsheets, we’ll make sure it will allow returns and updates to be made directly, help you transition from paper records or join a pilot.