The following sets out the key information surrounding the introduction of HMRC‘s Making Tax Digital (MTD) Plan.
What is MTD?
This is HMRC’s plan to digitise the tax system; it will be the biggest change in UK tax for over 20 years.
What is HMRC’s aim?
To digitise tax administration in the UK so it becomes more effective, more efficient and easier for taxpayers to get their tax right. Many businesses already use online banking and platforms to pay bills, or communicate with their customers or suppliers. Many are already using online accounting packages. Digitising the tax system is a natural progression of this.
Who is affected and when?
MTD will be rolled out in different phases. Phase 1 will affect most VAT registered businesses with a taxable turnover above the VAT threshold (currently £85,000). MTD will apply to VAT return periods that start on or after 1 April 2019, i.e. the VAT quarter ending 30 June 2019.
However, HMRC have acknowledged that more complex VAT registered entities may need additional time to get to grips with the new regime. Organisations such as traders based overseas, local authorities, trusts, not-for-profit organisations that are not companies, public corporations and some public sector entities will have until 1 October 2019 before they become mandated for MTD.
HMRC state that ‘taxable turnover’ includes standard, reduced and zero-rated, but does not include exempt supplies or income outside the scope of VAT. MTD will also apply to businesses that operate the Flat Rate Scheme for VAT.
Who else will be included in this new legislation?
Over the next few years, MTD will also apply to the self-employed who are not VAT registered, landlords, and businesses paying Corporation Tax not covered elsewhere. In the future, HMRC want to gather all taxes from businesses using the MTD process. The start date for these groups is yet to be confirmed.
Ultimately, individuals will also be affected by MTD. Whilst they will not need to submit tax returns, their income details will be collected from employers, banks etc. Individuals will then be able to confirm their income using the Government’s new online verification system at GOV.UK Verify
What are the key changes?
From 1 April 2019, VAT registered businesses will have to keep and maintain their business records in a digital format. They will also need to submit digital VAT records on a quarterly basis to HMRC using only MTD compatible software. Other types of businesses will have to follow suit in due course.
After 1 April 2019, businesses will not be able submit VAT returns using the current HMRC VAT portal.
What is ‘MTD compatible software’?
This is accounting software which allows the digital (online) exchange of your data to and from HMRC’s system. This could also include spreadsheets as long as they are capable of transferring information to and from HMRC’s system digitally using an Application Programming Interface (API), also known as ‘Bridging Software’.
What if a business’s turnover falls below the VAT threshold?
If, after 1 April 2019, a business’s taxable turnover falls below the VAT threshold (currently £85,000) they will still be required to keep digital records and to send their VAT returns to HMRC using MTD compatible software. However, if they de-register from VAT or they meet the MTD exemption criteria outlined later in this factsheet, MTD will not apply to them.
What is the ‘soft landing period’?
HMRC is allowing a period of time for businesses to set in place the appropriate digital links across all aspects of their MTD compatible software. This is known as the ‘soft landing period’. During this period, where a digital link has not been created between software programs, businesses will be allowed to cut and paste VAT return data.
Businesses who are mandated for VAT from 1 April 2019 have until their first VAT return period starting on or after 1 April 2020 to set up the correct digital links. For more complex businesses who do not enter MTD until 1 October 2019, they will have until their first VAT return period starting on or after 1 October 2020.
Are the deadlines for VAT changing?
No. Your current dates for submitting VAT returns and paying VAT bills will remain the same. Similarly, the date for making Income Tax payments is not changing.
What digital records do I need to keep for MTD?
You will not have to keep any additional records other than what you currently keep to calculate and submit your VAT returns, i.e. the 9 boxes of data on your VAT return. The only change is that you will now have to record all this information digitally.
What MTD compatible software is available?
HMRC have created a list of suppliers who have created MTD compatible software for VAT. This list will be updated as and when new software products become available. The current list can be found here:
Is HMRC providing free software?
No. Businesses affected by MTD will have to pay for any additional software and training needed in order to meet the MTD requirements. However, they will be able to reclaim VAT on these items where applicable.
Are any businesses exempt from MTD?
HMRC may grant exemptions to MTD on the grounds of age, disability, remoteness of location or for other reasons. Businesses run entirely by practising members of religious societies whose beliefs prevent them from using computers may also be exempt. Organisations who are already exempt from filing their VAT returns online will also be exempt under MTD.
What are the advantages of MTD?
As a result of transitioning to MTD, businesses will benefit from:
- having up to date financial records throughout the year, not just after the year-end when the final accounts are prepared
- improved accuracy of their records as a result of making fewer errors by using MTD compatible software rather than relying on manual calculations
- developing a better understanding of how the business is performing during the year, enabling them to make better, more timely decisions
- implementing more proactive tax planning strategies to minimise future tax liabilities
- having an improved cash flow position due to a better handle on debtors and creditors and knowing how much tax will need to be paid and when