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Making Tax Digital

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

 

Summary

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

  • MTD for Income Tax will start from April 2023.  This covers both unincorporated business and landlords  – in both cases where business turnover / rental income exceeds £10,000 per annum
  • MTD for Corporation Tax, date not set
  • 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.
  • 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 that seems like semantics.
    • There will need to be a year end submission as well, for annual adjustments and other information, so in practice 5 returns a year.
    • Some businesses will be eligible just to send “three lines” – income, expense and profit – but its unclear as to the scope of this concession.
  • Exemption for businesses with turnover below £10,000

 

These service offerings will be available when MTD for IT/CT comes in.

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.

 

Making Tax Digital for VAT (MTDfV)

This came into effect for most VAT registered businesses from April 2019. 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 regularly, 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 2021) 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.
  • 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 that seems like semantics.
    • There will need to be a year end submission as well, for annual adjustments and other information, so in practice 5 returns a year.
    • Some businesses will be eligible just to send “three lines” – income, expense and profit – but its unclear as to the scope of this concession.
  • 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

 

Choosing Software

For most businesses, either those in MTDfV now, or those planning ahead for MTD for IT/CT, then some type of accounts software will be necessary. Here are some thoughts:

  • Simple cloud based software is probably the best route for most small businesses. We recommend FreeAgent, but other options include Sage, QuickBooks, Xero – this isn’t an exclusive list
  • Various integrated banking and accounting products are coming to the market, eg Coconut. These are worth looking at, but our experience is that the ambitious scope of these products sometimes compromises usability and features, and there has been indications of product descriptions and roadmaps being unrealistic
  • Free accounting products are available, however we suggest caution – whilst free is attractive, product development costs money, so free risks things like cut down/locked features, low reliability, poor/no support, lots of advertising, or charges for add ons like giving an additional user / your accountant access.
  • Under MTD it is still possible to use Spreadsheets, however so called “bridging software” needs to be used to connect your spreadsheet to HMRCs servers via API. Our review of the bridging software market was disappointing in terms of reliability, usability, and compliance with HMRC guidelines. As a result we don’t recommend this route.
  • On a practical basis as a firm we are “open platform” – we will work with whatever systems you choose, so long as we can access them. We ask our clients to let us have secure logins for cloud products if you wish us to access them and/or meet any costs to us for accessing “accountants portals”.