With the roll-out of Making Tax Digital for Business just a few weeks away, we explain what it is and guide you through what steps to take to prepare for the change.
HM Revenue & Customs’ (HMRC) ambition is for the UK to become one of the most digitally advanced tax administrations in the world, via its initiative called Making Tax Digital.
HMRC recognises that many small businesses will need time to prepare for change and as a result, the Making Tax Digital (MTD) timeline has been revised from the original proposals to the following:
- April 2019 – Businesses with a turnover above the current VAT threshold of £85,000 will be required to maintain digital records – but only for VAT purposes. Businesses with turnover under the threshold will not have to use the new system but have the option to do so voluntarily if they want.
- April 2020 – Businesses will not be asked to keep digital records or to provide HMRC with quarterly updates for other taxes until 2020 at the earliest.
Overseas businesses that have UK taxable turnover above the UK VAT registration threshold will also be subject to the requirements of Making Tax Digital for VAT.
What’s the purpose behind Making Tax Digital?
The latest figures (2016/17) published by HMRC estimate that the tax gap stands at £33 billion which is 5.7% of tax liabilities. 41% (£13.7 billion) of the tax gap is attributed to small businesses.
The tax gap arises from issues such as errors (accidental and deliberate) and tax evasion. It is hoped that Making Tax Digital will help to reduce this gap:
- Digital records should eliminate errors with calculations
- Help is built-in to the software products
- Information is sent directly to HMRC from the digital records avoiding errors as data is transferred from one system-to-another
What will change under Making Tax Digital for VAT?
Since 2010, VAT-registered businesses have had to file their VAT returns online. They have been able to do this via bookkeeping software or they could by logging into the Government Gateway and manually inputting the figures.
According to the Office for National Statistics, there are currently 2.67 million businesses that are either VAT registered or registered employers (March 2017). Although 99% of VAT returns are submitted online, only about 13% of those are submitted via software. The other 87% of VAT returns are manually entered in to HMRC’s Government Gateway.
Under MTD for VAT, affected businesses will no longer be able to use the Government Gateway website. Instead, they will have to submit their VAT returns via MTD-compliant software. They will also need to maintain their records digitally.
This means hand-written records will be a thing of the past for businesses affected by MTD for VAT. Someone will have to convert them to digital records whether that be the business owners, a staff member, a bookkeeper or their accountant.
Who is affected by Making Tax Digital for VAT and when will it apply?
From 1st April 2019, VAT-registered businesses with a ‘taxable turnover’ above the VAT threshold (£85,000) are required to keep digital records for VAT and send HMRC their VAT returns using MTD-compatible software.
‘Taxable turnover’ includes standard, reduced and zero rated, but does not include exempt supplies or income outside the scope of VAT.
Once within the scope of MTD for VAT a business will remain subject to the rules, even if VAT taxable turnover subsequently fall below the VAT registration threshold. However, the rules will no longer apply if the business deregisters from VAT or meets one of the exemptions.
The new rules will apply to VAT accounting periods that start on or after 1st April 2019.
Are the VAT deadlines changing under Making Tax Digital?
The deadlines for submitting VAT returns and making payments are not changing, including for monthly, quarterly and annual VAT return schemes. The only thing that will change is that those businesses caught by MTD for VAT will have to keep digital records and send the returns to HMRC using MTD-compatible software.
What will be filed under Making Tax Digital for VAT?
Under current proposals, only the same nine boxes will be filed. The individual transactions will not be visible to HMRC. Headline data such as the business name, the principle place of business, the VAT registration number and any VAT schemes being used will also be shared in the submission.
VAT software for Making Tax Digital
If you already use software, you should speak to your software provider to find out when it will be MTD-compatible and what you must do. From April 2019, software must be MTD-compatible in order to send VAT returns to HMRC.
Soft landing for Digital Links
Sometimes businesses use multiple software systems to compile their records and prepare their VAT return. Under MTD for VAT rules, where several information sources are combined then they must be “digitally linked”. However, if information needs to be transferred from one solution to another the HMRC has allowed soft landing period of one year. During this time, the transfer of data between all parts of a business’ software does not have to be via a “digital link”. HMRC will accept cut and paste during the soft landing, which applies to VAT returns starting during 1st April 2019 and 31st March 2020.
Can I Still Use Excel Spreadsheets with Making Tax Digital?
If you use spreadsheets, the spreadsheets must be able to submit the required data to HMRC digitally. If the spreadsheet cannot do this, then the VAT return must be submitted via separate MTD-compatible ‘bridging software’. Bridging software allows relevant data to be digitally exchanged from the spreadsheet or other source where the digital records are kept, directly to HMRC.
Unfortunately, the use of spreadsheets with bridging software is excepted from the soft landing for digital links (mentioned above). This means the link between the spreadsheet and the bridging software must be digital for VAT periods starting after 1st April 2019.
Finding Compliant Software
HMRC has released a list of software houses that have both:
- Tested their products in HMRC’s test environment
- Already demonstrated a prototype of their software to HMRC
Could I be exempt from Making Tax Digital for VAT?
There are exemptions available from the current rules for filing VAT returns online:
- Religious grounds
- Any business for whom HMRC is satisfied that it’s not reasonably practicable to make a return using an electronic return system for reasons of disability, age, remoteness of location or any other reason
Businesses currently exempt for the above reasons will also be exempt from Making Tax Digital for VAT.
However, if you’re hoping you could be exempt from MTD for VAT, please be aware that of the 2.67 million businesses that are either VAT-registered or registered employers, only about 4,000 VAT-registered businesses are currently exempt from filing VAT returns online (excluding insolvent businesses).
Two-tier penalty system for late payments
In its draft Finance Bill 2018-19, the Government outlined a two-tier penalty system that will affect those businesses which come under the Making Tax Digital remit.
The proposed penalty regime for businesses and individuals will be enforced within 15 days of an overdue tax payment. However, the draft bill has indicated there will be an initial grace period for late filers who may still be getting to grips with the new digital system.
HMRC has confirmed that fines for being unable to maintain digital records will come into force from April 2019 too, but there will be an initial grace period for those whose financial data is overdue. Fines for the late filing of digital returns will be imposed the following year from April 2020.
What are the advantages of digital record keeping?
Some businesses will inevitably need to change how they maintain their books, but there will be advantages of digital records:
Accurate Tax Information
Replacing paper-based bookkeeping with digital tax accounts means you can check the information HMRC hold about you is accurate.
Real Time Financial Records for your business
Making Tax Digital’s new digital reporting will allow taxpayers to look at up-to-the-minute tax information almost instantly
Reduction of Errors
Data will be transported digitally, greatly reducing human error from data input.
Easier to understand
HMRC is confident that taxpayers will find it easier within their digital tax account to understand how much tax is owed in a similar way to using online banking.
Making Tax Digital pilots
HMRC has launched a private MTD pilot for VAT working closely with software providers so that they can test their systems and the products. HMRC are aiming to expand the pilot to the public later in 2018.
Please note, that once a business starts using MTD for their VAT returns, even if before April 2019, it can no longer file returns using the Government Gateway.
MTD for Income Tax is available now on a voluntary basis for the smallest businesses and landlords.
Your Making Tax Digital for VAT Checklist
|Does it apply to my business?||Familiarise yourself with HMRC’s plans. Will it apply to you? If so, when?||X|
|Will my bookkeeping software work?||Ensure you know when your software supplier(s) will be MTD-compliant|
|Is my tax adviser ready?||If you use a bookkeeper or accountant, make sure they’re ready for Making Tax Digital|
Need help with Making Tax Digital for your business?
Your local TaxAssist Accountant can work with you to prepare your business for Making Tax Digital. As small business owners ourselves, we understand what it takes to manage your business records digitally.
If you would like our team to help you through these digital changes, don’t hesitate to arrange a free initial consultation by calling 0800 0523 555 or completing our online enquiry form.
By Jo Nockels FCCA
Last updated December 2018
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.