Making Tax Digital Update

Unveiled in the Spring Budget of 2015, Making Tax Digital (MTD) is an initiative by the UK government to bring all tax submissions online.

The primary purpose of MTD is to improve accuracy - an estimated £9bn is lost every year due to mistakes and errors in reporting tax. For businesses, the benefits of the scheme include having all their tax information accessible online, which will help with the management of finances as well as planning and budgeting. The Government says that going digital with tax will ultimately save businesses costs and improve efficiency.

In this blog post, I want to explore all you need to know, as a small business owner, about the Making Tax Digital rollout. Before we look at the what though, let’s look at the when.

Timeline

Originally set to be phased in through the 2018/2019 and 2019/2020 tax years, the Government announced that the process would instead begin in 2019, following a consultation period during 2017. So key dates to remember are:

  • April 2019 - Quarterly VAT reporting becomes mandatory for all VAT registered businesses with a turnover above the £85,000 VAT registration threshold.
  • July/August 2019 - The first return under the MTD scheme, will need to be submitted by this point.
  • April 2020 (earliest) - Quarterly reporting for Income Tax and Corporation Tax becomes mandatory for all businesses and landlords. For individuals, partnerships, executors and trustees, only income for trading and properties needs to be reported quarterly via MTD.

As with VAT, the rule will only apply to those who exceed a certain threshold, which will initially be aligned with the existing VAT threshold, i.e., £85,000. Reporting via MTD is optional for businesses that are below the VAT threshold.

Although MTD is being phased in for VAT returns in 2019, corporation and income tax returns, which are slated to go digital in 2020, will not do so until the Government is satisfied that the process with VAT is "shown to work".

What is Digital Record Keeping?

MTD means keeping all your taxes and accounting information in digital form. In effect, this means businesses will need to move to digital record keeping, using HMRC approved software to submit their returns online. A digital record is a record that can be viewed on an electronic device, such as a computer, mobile phone or tablet. The record can take the form of an imaged document or an entry into accounting software.

Once data has been recorded onto a software system, it must remain digital. That means, if data is transferred from one piece of software to another, there must be compatibility between the software systems, so there is a 'digital link'. An example of a digital link would be where one piece of software automatically populates data to another piece of software, creating an audit trail. Manually copying and pasting information from one system to another would not be considered to be a digital link.

Being Prepared for MTD

A 2018 study by the British Chambers of Commerce found that 24% of the businesses they surveyed were simply not aware of MTD at all; a figure they called “an alarmingly high proportion of UK businesses”. 66% of businesses were aware of MTD in name only but, of these, only 25% had plans in place for the April 2019 deadline.

Most businesses are already required to submit quarterly tax returns, so moving to MTD will only involve a change in the method of reporting. In the majority of cases, the fundamental requirements on tax returns will remain the same. But the changes in these methods mean that businesses must review their methods of record keeping and making sure the finance software they are using (if any) is MTD ready.

In addition to keeping records in a digital format, businesses must submit their tax reports using MTD compatible software. This means software that has been given an individual reference so that when businesses connect with HMRC online, their software will be authenticated. 

HMRC has been working with a large number of software providers, including big industry players like Quickbooks, Xero and Sage, during the pilot phases of the initiative. Check with your supplier whether or not they will be providing software that is MTD enabled.

Exemptions

Some businesses may be exempt from the MTD initiative. This may include insolvent businesses or businesses that cannot use electronic communications because of religious beliefs. Businesses may also be exempt if they are unable to submit returns due to location, age or disability.

For more information on digital record keeping, digital links and MTD compatible software, keep an eye on the HMRC website where updates and new developments will first be reported.