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Making Tax Digital

Making Tax Digital – MTD – is HMRCs strategy for moving all business taxes to a digital platform.

The programme has been through many changes, and at present time-scales are:

  • April 2019 – VAT registered businesses have to submit VAT via Making Tax Digital for VAT
  • 2020 onward – date not set – all businesses will potentially need to submit Income Tax and Corporation Tax information via Making Tax Digital – the date isn’t set, and it could be several years away.  Original proposals exempted businesses with a turnover below £10,000

As a firm YogaTax are committed to supporting our clients through this change, but it needs to be clear there will likely be cost implications both on our fees and the need to purchase or rent suitable software for those businesses not using software packages already.

In terms of software choices, most mainstream programs should be MTD compatible.  Whitefield have partnered with FreeAgent which we believe will offer most of our clients an economical way of meeting MTD obligations.

We will keep people updated.

Key aspects for Making tax Digital for VAT are:

It affects any business which is compulsorily registered for VAT, that is to say with a turnover over the VAT threshold £85,000.  Businesses with a turnover below that level, but registered for VAT voluntarily, do not need to comply with MTDfV unless their turnover goes over the VAT threshold.

Three new key obligations are introduced:

  1. VAT returns are submitted using software connected to HMRC via API.  You cannot submit via HMRC website.
  2. You must keep your accounting records digitally
  3. You must prepare your digital records regularly

2 and 3 have an element of subjectivity.  HMRC don’t expect everything to be recorded digitally, but do expect the major part of your business record keeping system to be digitised and updated reguarly, and for links between different data sources to be automated:

  • eg – suppose you run a cafe and people mostly pay by cash.   You do not have a till.  You are not expected to keep a digital record of each customers cash payment, but you must keep a digital record of the daily total from customers.

Likewise you cannot rely on writing your records up quarterly just before your VAT return is due:

  • eg continuing from above, the daily summary of cash from customers must be entered into your accounts system regularly, say daily or weekly, not at the end of the quarter.

Its to be hoped that HMRC enforce this pragmatically, but we have to see how it unfolds – a soft landing is promised.

You will need to:

  • Comply with these new rules for the first VAT period beginning on or after 1 April 2019 (meaning the first quarterly return affected will be 30 June 2019)
  • Select suitable accounting software
  • Make sure your software connects to HMRC
  • Ensure that your business’s processes provide for data to be entered regularly into your software. If you use an external bookkeeping service, you will need to agree changes to processing times with them, eg monthly or quarterly to weekly.

Key aspects longer term for Income Tax and Corporation Tax (post 2020) are:

  • Businesses and Individuals will have a “Digital Tax Account” into which assorted information will be collated.
  • Businesses must keep all accounting information in a programme or app which can communicate directly with HMRC – no more paper records.  A late concession form HMRC is that spreadsheets can be used but thet will have to communicate with HMRC systems “possibly via additional software” (their words, paraphrased – no idea what this software will be, some type of gateway?)
  • Send updates to HMRC four times a year, with details of income, expenses and profit – HMRC is at pains to say these are not quarterly accounts, although to most of us looking at the proposals that seems like semantics.  There will need to be a year end submission as well, for annual adjustments, and the annual Self Assessment for other items – so in effect six returns a year.  Some businesses will be eligible just to send “three lines” – income, expense and profit – but its unclear whether this concession is more than a fig leaf.
  • Exemption for businesses with turnover below £10,000
  • Applies to landlords as well as sole traders/partnerships/companies  possibly also to individual taxpayers in receipt of “other income”, eg company directors and dividends