Guide to Making Tax Digital for businesses

Guide to Making Tax Digital for businesses

What is required under Making Tax Digital initiative and how will the regime affect businesses?

Making Tax Digital (MTD) was first announced by the government in 2015 as an initiative to improve the effectiveness and efficiency of the UK tax system, and reduce its complexity.

The government’s original goal was to transform the tax system by 2020 by introducing digital recordkeeping and quarterly updating for businesses, the self-employed and landlords for income tax self-assessments, value-added tax and corporation tax.

The original timeline set out by the government proposed a phased introduction of MTD between the 2018-19 and 2020-21 tax years.

However, following consultation with the industry, in July 2017 the government announced that it would delay the introduction of MTD to April 2019 at which date the scheme would only apply to VAT. It said that the initiative would be extended to taxes other than VAT by 2020 at the earliest.

So, what is required under MTD and how will the initiative affect businesses?

Reasons for MTD

The government has said that one of the main reasons behind the MTD scheme is to help close the tax gap by helping businesses to “get their tax right”. It has estimated that over £9bn is lost annually as a result of tax errors and mistakes.

The government has also outlined some of the key benefits of the MTD scheme for businesses, including the ability to know where they stand when it comes to tax affairs; being able to access tax information online in one place; being able to work collaboratively with an agent; and being able to plan and budget effectively. These benefits will enable businesses to drive performance and successfully manage their financial affairs. According to the government, benefits of MTD for businesses include remaining competitive, boosting productivity and being able to capitalise on going digital through cost and efficiency improvements.

What will change for businesses under MTD?

MTD for VAT

From April 2019, businesses that are registered for VAT and have turnover above the VAT registration threshold of £85,000 will be required to keep digital records for VAT purposes and submit their VAT return to HMRC through MTD compatible software.

Businesses will need to keep the following information as digital records:

  • Business name, principle place of business and VAT registration number (to also include the VAT accounting scheme used by the business)
  • The VAT account showing the audit trail between primary records and the VAT return
  • Details about supplies made and received

Businesses will need to submit their VAT returns using compatible software, which will pull information from the digital records.

Digital records will need to be preserved for up to six years.

If businesses need to make amendments to their VAT return, the existing error correction rules will apply. This involves correcting non-deliberate errors on the next VAT return (errors must be within the four-year limit). Errors that do not fall into this category should be recorded through the submission of form VAT652.

MTD for corporation tax

MTD for corporation tax will not come into effect until 2020 at the earliest. HMRC has said that the scope of the initiative will not be widened outside of VAT until the system “has been shown to work” and to provide sufficient time to test the system fully.

Self-employed and landlords

VAT-registered businesses and landlords with income above the £85,000 VAT threshold will need to report for VAT purposes only from April 2019.

Voluntary participation

Businesses that are not required to begin keeping digital records for VAT from April 2019 will still be able to participate on a voluntary basis. HMRC has said that it expects many businesses to move to the system in April 2019 even if not required to do so.

Businesses will also be able to submit VAT data on a more frequent basis than mandated. Voluntary updates submitted outside of the VAT return cycle could be used in situations where a business wishes to notify HMRC of a change in circumstances.

Exemptions

Exemptions from MTD for VAT will apply to a number of businesses. These include businesses that are unable to use electronic communications because or religious beliefs; insolvent businesses; and businesses that are unable to submit returns electronically because of disability, age or remoteness of location.

Costs

Businesses are likely to face one-off costs and ongoing costs.

One-off costs will enable a business to transition to the MTD scheme. These include the time spent implementing new software for compliance with MTD; purchasing new or upgrading existing hardware; accountancy or agents costs to support the MTD move; and training staff in the MTD process.

Ongoing costs for businesses include moving to MTD compatible software; using bridging software to support MTD compatibility for spreadsheets; and increases on current software costs as a result of businesses bearing the burden of the MTD software improvement costs.

Software

Businesses must use software that can connect to HMRC systems via an Application Programming Interface (API) in order to comply fully with MTD. As such, the software must be able to:

  • Keep digital records in accordance to MTD regulations
  • Preserve digital records in line with MTD regulations
  • Create a VAT return with digital information held by the software and digitally send this information to HMRC
  • Provide VAT data on a voluntary basis to HMRC
  • Receive information from HMRC via the API platform with regard to an entity’s compliance with obligations under MTD regulations

HMRC started a limited pilot for VAT in 2017. The pilot is due to expand in spring 2018.

Penalties and interest

HMRC has previously consulted on the penalties regime for MTD. The system is likely to be a points-based model with taxpayers receiving a point every time they fail to submit on time. The model is likely to be introduced for VAT in 2020 once taxpayers in the April 2019 intake have become familiar with the system.

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