You will have seen an exhausting amount of adverts mentioning HM Revenue & Custom’s ‘Making Tax Digital’ (MTD) recently. It really is happening and it’s here now. First announced back in the 2015 Budget, MTD is the government’s aim of achieving the most digitally advanced tax system in the world and has been constantly evolving it since its announcement. This is brief guide on the changes you may see now and in the future.
The idea is that business owners will no longer be able to manually pay tax via pen, paper and post – a process that HMRC says causes over £9bn worth of tax to be “lost” every year due to human error. By human error, HMRC means inputting the figures manually using your Government Gateway account.
HMRC estimates that MTD will contribute over £1bn to the Exchequer by 2022/23.
What will it mean for my business?
From April 2018, the government began live testing of the system which allowed some small business owners to keep online records of their income and expenditure for Income Tax purposes, and send quarterly updates to HMRC via their payment software or app. HMRC requires online records to be kept in ‘functional compatible software’, of which there are many available. The complete list of HMRC-approved software can be found here but Coult & Co is an official Xero Partner and can offer a discounted monthly price to clients, and we would encourage you to contact us for further information on this.
From 01 April 2019, MTD now forces VAT registered businesses* to keep VAT records online, and to provide their VAT return information to HMRC through compatible software such as Xero and others you will have seen and heard advertised recently.
However, businesses that may presently keep their records in a cashbook, offline spreadsheet or non-MTD-compliant software, will need to make changes as the ability to login to HMRC’s website and manually input the VAT return figures will eventually be removed for businesses with a turnover greater than £85,000, and HMRC will require a live digital link to your input data to be in place so VAT figures cannot be changed. This does not mean that HMRC can look at your spreadsheet or wherever you hold your data, instead they just have a live link to the exact cell that your gross, net and VAT figures are calculated and displayed.
You don’t need to wait for Making Tax Digital to apply to your business; you can voluntarily comply with Making Tax Digital for VAT from April 2019, if you wish. There are advantages to getting ahead, particularly if you have to change your bookkeeping processes and need time to get to grips with new software.
Changing software mid-way through an accounting period can be messy and isn’t recommended, so it’s best to plan ahead for Making Tax Digital. Don’t leave it until the last minute!
*MTD for VAT will not be mandatory where turnover is below the VAT registration limit, currently £85,000 per annum.
When will it be fully implemented?
The government has stated that it will not widen the scope of Making Tax Digital for business beyond VAT before the system has been shown to work well. It is then expected that the full system will be rolled out from April 2020, although this date is very fluid given the Brexit timetable taking priority for many government departments for the next couple of years, and many government staff being told to put their usual duties to the bottom of their work pile to concentrate on resolving Brexit.
This means that many businesses will breathe a sigh of relief as this gives more time to plan, upgrade software if needed and focus on their business in general. HMRC will use this period to continue rigorously testing the system by expanding the next pilots and carry out further consultations.
What are the business benefits of Making Tax Digital?
The bottom line is more transparency: Having an online tax account which they can access at anytime, business owners will be able to see what information HMRC holds on them, and as a result, won’t waste time re-submitting it to accountants or requesting it.
Real time data: Business owners will no longer have to wait until the end of their accounting year to find out how much tax they have to pay. With a digitalised tax system, HMRC will collect and process tax information in real time to help prevent errors and stop ‘tax due’ or ‘repayments owed’ building up and business owners having a shock when it comes to paying what is due.
Online banking: Much like the online account you have for your own bank account, by 2020, business owners will be able to view liabilities and entitlements as a single financial account all merged in one place thanks to bank feed integration which most software providers now offer. Again, HMRC will not be able to peer into your bank account through MTD. The bank account link is for you to benefit from integration.
More flexibility: Being able to contact HMRC on its website via live webchat and secure messaging, as well being able to receive and send data via whatever payment software they use, business owners can interact with HMRC live at a time convenient to them.
What do I need to do next?
Ultimate responsibility lies with you as an individual or business to take the first steps to adapt for MTD. If we already handle the filing of your quarterly VAT returns then little, if any, changes need to be made from your end. We already use dedicated agent software for accountants to file VAT returns and, in most cases, you can continue sending us documentation and information in the format you already use.
Since Making Tax Digital was first announced, we have adapted our systems and processes to ensure that we were ready ahead of the service going live in April 2019.