Making Tax Digital
“MTD” is the biggest change to the administration of the UK tax systems since the introduction of self-assessment in 1996.
What is Making Tax Digital? MTD is part of the government’s plan to make it easier for businesses to stay on top of their day-to-day accounts. HMRC wants to be one of the most digitally advanced tax administrations in the world – improving efficiency, effectiveness and ease of compliance, which means no paper and more regular reporting.
The main changes can be summarised as follows:
- Paper records will not be sufficient – It will be mandatory for almost all businesses and landlords (self-employed, partnerships and limited companies) to use software or a spreadsheet (the latter being a recent concession and not our favoured route), to keep accounting records. Paper records will cease to meet the requirements, although invoices and receipts (scanned copies are fine) should, in our view, be kept to support the electronic records in case of an enquiry.
- Quarterly reporting – The requirement to submit updates to HMRC quarterly from software, within one month of the end of each quarter.
VAT – VAT is the first milestone for MTD with the requirement to keep digital accounting records and file VAT returns using MTD compliant software by April 2019 (the first VAT quarter starting on or after 1 April 2019)
The current online VAT return submission which all VAT registered businesses complete will not meet the requirements for MTD and will be phased out.
Most of the big names in financial software should be MTD compliant. Our preferred software, as a partner business, Xero, is on the current VAT commercial software suppliers list. As it currently stands, however, there’s not actually a list of MTD VAT-approved software suppliers, as HMRC is yet to test suppliers, from which it will decide when it is appropriate to publicise the list of products that will be MTD-ready.
Income tax (self-employed, partnerships, trusts and landlords who currently complete self-assessment returns) – MTD is not expected to be mandatory for income tax reporting until April 2020, based on the current plan. Although a small pilot is currently taking place and is likely to be rolled out further to all businesses who wish to participate earlier.
Corporation tax (companies) – No MTD timeline has been provided for corporation tax yet, but it is not likely to be before April 2020.
Are there any exemptions to MTD?
Yes, but not many:
- Exemptions for those who are unable to engage digitally for religious reasons, or due to a factor such as age, disability or location (i.e. no broadband). Basically, the same exemptions as currently apply for the online filing of VAT returns.
- VAT registered businesses with a turnover of less than the VAT threshold, i.e. those who have voluntarily registered, although this exemption will be removed in 2020.
- For income tax MTD, there will be an exemption for businesses and landlords will a small turnover. The threshold is not set yet, but is expected to be in the region of £10k.
Harbour Key will support you through the changes and provide you with the ongoing filing services that you require. However, the changes are so fundamental that to prevent disruption we would advise that you review your current record keeping systems now, so new systems can be put in place if required.
Steps that can be taken now in preparation:
- If you already use financial management software, check with the provider where they are with their MTD update and ask if there will be an additional charge for the update and when it will be available, so a plan can be made if required for any migration from one system to another. Most cloud based software updates should be automatic, but again check and if moving to a cloud based package, check you have sufficient broadband connectivity (we have a client who had insufficient capacity to run SAGE cloud).
- If you have no financial management software in place, then speak to us, as we can discuss the packages available and which will best suit your business. You have no option, you have to move to digital system in the near future. However, the benefits of switching to modern accountancy software stretch far beyond just MTD, such as invoice raising capability, recording employee expenses direct to the system, financial reports generated quickly, etc.
- If you currently use a spreadsheet to maintain financial records, you will need to acquire software which will allow returns and updates to be made directly from the spreadsheets. We are not that keen on spreadsheets and our view is that most software packages are reasonably cheap and have added benefits,
- Look at your internal processes and procedures for financial management – are they sufficient to meet quarterly reporting, for example do you need to outsource your book-keeping or bring in additional resource?
MTD is a big change and HMRC has confirmed that the penalties for failure to keep digital records will come into force immediately from April 2019, while there will be a grace period for those who file late. It is therefore important that VAT registered business consider the change now.
Should you need any help or assistance, please do not hesitate to call Harbour Key’s offices.