Introduction
H M Revenue & Customs (HMRC) says that Making Tax Digital (MTD) is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world.
HMRC argue that MTD will transform tax administration so that it is more effective, more efficient and easier for taxpayers to get their tax right through the implementation of a fully digital tax system.
We, and lots of other accountants and clients, generally do not agree with what HMRC are saying. Some would say that HMRC are on another planet.
For lots of smaller owner managed businesses who are VAT registered, MTD will mean spending more on new software and changing their existing systems in order to do more or less what they have been doing for many years.
HMRC will not be providing any free software for Making Tax Digital recordkeeping or reporting.
Digital by default
Mandatory Making Tax Digital for VAT (MTD4VAT) came into effect from 1 April 2019 and applies to VAT-registered businesses with turnover over the £85,000 VAT threshold.
Under the new VAT reporting system, businesses will have to maintain digital records and send their VAT returns to HMRC using new MTD-compatible software. This applies for VAT accounting periods starting on or after 1 April 2019 (1 October for those that have been deferred e.g. using annual accounting schemes).
Businesses below the VAT threshold will not need to comply with MTD for VAT, though they can elect to join the new system.
Digital records include accounting software, including spreadsheets, whether they our cloud based or desktop based. There is a lot of misunderstanding regarding digital records and submission of VAT returns.
From the point that you enter accounting transactions into your digital accounting records there must be no re-keying of data between software packages or when submitting your VAT return. HMRC refer to digital links. You are allowed to use more than one piece of accounting software to maintain your accounting records. However, any links between the different software must be digital. You are not permitted to retype numbers or to copy and paste numbers between software packages.
Paper records will no longer by adequate. It will not be possible to just input totals from paper records into MTD compliant software.
Most small businesses currently log on to the HMRC Government Gateway portal each quarter end. They then type several numbers into a summary VAT return screen. Once MTD for VAT starts then this system, which has been used by smaller business for many years, will no longer be possible.
Businesses will have to sign up for MTD for VAT. It is not too complex, though HMRC have made the process more difficult that it needs to be. Businesses must therefore proactively move over to the new system; HMRC will not automatically move them over.
For many of our smaller business clients, we are able to use our Excel based bridging software. This software is able to ‘pull’ the accounting data, through digital links, from your spreadsheet and then ‘push’ this through an Application Programming Interface (API), another digital link, to HMRC.
What is not changing?
Apart from the requirement to keep digital VAT records and to submit your VAT returns through ‘functional compatible software’ then nothing else is really changing.
The deadline for sending VAT returns and making payments is not changed, including for monthly, quarterly, the flat rate scheme and the annual VAT return scheme.
The method how VAT is calculated is not changing.
Businesses will not have to keep electronic copies of invoices or receipts. However, they must digitally record the underlying transactions.
HMRC will not receive details of each and every transaction. However, there is talk of moving to this system in the future. HMRC will still only receive the same nine box totals as an existing VAT return.
Requirement to sign-up to Making Tax Digital
Please note that all businesses affected by MTD have to actively either sign themselves up or have an agent [accountant] sign them up on their behalf.