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Making Tax Digital

HMRC’s vision to digitalise the UK tax system is underway. The transformation has started with Making Tax Digital (MTDfV) for VAT from April 2019.

Now that MTDfV has been implemented, MTD for income tax (for the self-employed and those with income from property) and MTD for corporation tax are expected to follow, but not before April 2020 at the earliest. HMRC is also running an MTD for individuals transformation project.

The essential elements of MTD are:

• Businesses and organisations (which includes those with income from property) will be required to maintain digital accounting records. Maintaining paper records will cease to meet the legal requirements in tax legislation
• Businesses and organisations will be required to use a functional compatible software product to submit their returns to HMRC. The software will use HMRC’s API (Application Program Interfaces) platform to submit information to HMRC. The current HMRC online tax return services will be withdrawn for those within the scope of the MTD rules.

We will of course keep you updated on any future announcements and as more information is released on future timelines for MTD. In the meantime, we strongly recommend that if you are not currently maintaining your VAT records digitally, that you read the following information and talk to us as soon as possible should you need any help or advice.

Making Tax Digital for VAT

From 1 April 2019, businesses have been mandated to use the MTD for Business system to meet their VAT obligations – termed Making Tax Digital for VAT (MTDfV). Currently, only businesses with a turnover above the VAT threshold (currently £85,000) will be required to use MTDfV. The legislation affects all businesses regardless of its legal structure – company, charity, trust, partnership, sole trader, LLP or public body.

Records will need to be kept using ‘functional compatible software’. ‘Functional compatible software’ can be a spreadsheet or software (or a combination of the two) that will allow the user to connect to HMRC via an Application Programming Interface (API).

VAT returns – how will they be submitted

Those businesses that fall within the scope of MTDfV will no longer be able to manually enter VAT figures onto the HMRC portal. Returns must now be submitted through business functional compatible software, which will be communicating digitally through HMRC’s API platform.

Who is exempt from these changes?

 There are exemptions for groups who can’t engage digitally for religious reasons or due to factors such as age, disability or location (e.g. no availability of broadband). These exemptions mirror the current exemptions for VAT online filing.

Using third party software and keeping digital records

Under MTDfV, businesses must make use of functional compatible software to meet the new requirements. VAT returns will be calculated and submitted to HMRC via the API platform. Returns will be able to be submitted using software, bridging software or API-enabled sheets.

Will there be penalties for non-compliance?

In April 2019, when MTDfV comes into effect, HMRC will allow a ‘soft landing’ in the first twelve months, which will give more time to allow digital links to be put in place. Cut and paste of records can be used during this period.

What action should my business be taking?

• If your business turnover is above the VAT threshold, then you need to make sure your systems are compliant with the MTDfV requirements.
• If you currently use accounting software for your VAT Returns, it may already be fully or partially compliant. However, we recommend that this is assessed.
• And if you are considering acquiring new software you will need to choose something that is approved by HMRC.
• If your records are currently kept on spreadsheets you will need to acquire software which will allow returns and updates to be made directly or alternatively you will need to look to outsource this function to someone who can do it for you.

How can we help?

MTDfV may sound daunting, but as accountants and business advisers we are here to help your business be ready and fully compliant with these fundamental changes to VAT submissions. We can:

• Help you assess your current VAT returns process to establish what you need to do to be compliant.
• If you need to buy approved accounting software, help you understand which package is right for you, as well as helping you with the installation and training.
• Provide you with outsourced bookkeeping service so that we can keep your records and file VAT returns on your behalf.
• If applicable, help you assess if you need to apply to HMRC for an exemption.

We strongly recommend businesses, especially those using paper based reporting systems and spreadsheets, that they speak to us as soon as possible to assess their current VAT processes and help them look at some of the key cloud accounting packages that are available.

Read our fact sheet and recent articles

Making Tax Digital for VAT factsheet.

Revenue publishes more information on Making Tax Digital.

Making Tax Digital for VAT: an update on digital links.

Making Tax Digital: where are we now?