What is Making Tax Digital and what does it mean for small businesses?
Making Tax Digital – the business owners’ buzzword of 2019. So what does it mean, why is it happening, and who does it impact?
Why is HMRC Making Tax Digital?
According to HMRC, 9 billion pounds is lost every year as a result of tax calculation mistakes, something that can be mitigated in most cases with the implementation of MTD. The new system optimises efficiency and enables business owners to make accurate tax calculations – reducing the risk of human error.
Seeing the necessity to make tax administration more effective, efficient and simple, HMRC are taking steps towards a fully digitalised service that revolutionises tax reporting as we know it today, with the aim to become one of the most digitally advanced tax administrations globally.
What is MTD for VAT?
MTD for VAT is currently at the forefront of the initiative, requiring MTD compliant software to keep digital records, prepare VAT returns, and exchange information between your company and HMRC. Business owners will no longer be able to upload their records to HMRC’s website manually.
- Business owners will be required to keep digital records of their taxes, using MTD compatible software – manual VAT records will no longer be a compliant way of recording tax information.
- Rather than submitting digital records directly to HMRC’s website, business owners will instead need to submit tax reports via their MTD compliant software.
What is MTD compliant software?
There are two options for choosing software that is compatible with MTD. You can either use one product that does everything, or several different products that are linked together:
- Select from HMRC’s list of software capable of both keeping and submitting tax records. Popular choices are Xero, Sage, FreeAgent, KashFlow and Reckon – all of which integrate with Tide, with QuickBooks coming soon!
- Use a spreadsheet to to keep your tax records alongside a bridging or linking software to upload them. Bridging software will provide a digital link to connect the spreadsheets directly to HMRC and ensure a seamless flow right from data entry, through to submission of the VAT return.
Nb. When using spreadsheets there can be no manual intervention or re-typing of information such as copying and pasting, noting totals, or manually updating information.
Who does MTD for VAT apply to?
April 2019 is a key date for the majority of VAT registered businesses.
From April, all registered businesses with a turnover above the VAT threshold (currently £85,000 excluding VAT) must use MTD.
If your business is voluntarily VAT registered, you can choose whether or not to use MTD, if your business is not VAT registered at all you won’t be affected at this stage.
It’s worth noting, certain businesses have been deferred from MTD requirements until October 2019, for example: trusts, not for profit orgs, public sector entities and local authorities. If you’re unsure whether the deferral includes your business, you can call the VAT helpline.
The complete timeline has yet to be set in stone, but it’s expected that from around April 2020 all remaining VAT registered businesses will also be obliged to comply with MTD.
Are there any exemptions?
According to the Chartered Institute of Taxation, you can apply for your business to be registered as officially exempt if it is incompatible with your religious beliefs, disability or remoteness of location, amongst other extenuating circumstances. If you think you’re eligible for exemption you should contact HMRC as soon as possible.
How do I sign up for MTD?
You can sign up for MTD at GOV.UK, where a support function is available should you need assistance. It’s important to note that once you’ve signed up to MTD, you cannot go back and use your old method. Once you’re signed up to MTD you must start using your MTD compliant software to send returns.
What if I don’t comply with MTD?
There will be penalties in place for those who don’t comply with MTD, but it’s likely these won’t be enforced in the initial stages, so don’t panic! HMRC recognise that MTD is a big change for business owners so they’re taking a lenient approach, recognising that people may make mistakes during the transition period. If something out of a businesses control goes wrong, or genuine accidents occur, HMRC may refrain from inflicting penalties.