MTD – or Making Tax Digital – is a government initiative to improve efficiency for businesses and increase transparency around accounting. As part of this plan, HMRC are moving away from the current process of filing accounts annually.
From April 2019, businesses above the VAT threshold (i.e. with taxable turnover of £85,000+ per annum) will be required to file returns every three months via a digital tax account. Making Tax Digital will make the overall process easier, as some information will be harvested automatically from the digital account (such as bank data). It won’t be acceptable to assume that the correct details have been collected, however – the relevant personnel will still be responsible for checking data, ensuring its accuracy and supplementing with additional information if necessary.
For those who already compile quarterly VAT reports, the system will not be a shock; but for those who don’t, it is worth starting to prepare early. Moving to a digital way of working sooner rather than later will help to ease the transition and ensure MTD has no impact on day-to-day business.
When Does Making Tax Digital Start – and Who Does it Affect?
MTD will be rolled out in stages, beginning in April 2019. At this point, all businesses with a turnover that exceeds the VAT threshold will be required to keep digital records (including unincorporated companies, LLPs, and charities). The exemptions for electronic VAT filing will also apply to MTD, and businesses that are VAT registered but do not meet the turnover threshold will be granted automatic exemption. If your business would be exempt under these terms but you’d like to opt for early enrolment, you can do so.
The next phase will begin in 2020, when businesses may be required to submit additional financial information every three months (relating to other taxes, for instance).
How Do I Begin?
In order to comply with HMRC’s requirements for the roll out, all eligible businesses will need to:
- Keep adequate digital records. This does not mean that it will be mandatory for businesses to operate using only digital documentation. If companies wish to continue working with paper records – invoices, for instance – they are welcome to, but they will need to upload and store all such information in digital form, too. See below for more details on which records must be kept.
- Utilise appropriate third-party software. The software must have the capacity to keep and preserve digital records, and produce VAT returns from these records; if necessary, it should also be possible to extract and provide data periodically via the platform. In order that HMRC may deliver messages as required – or provide ‘nudges’ – the software will need to be compatible with their API (application programming interface).
A note on spreadsheets: if you’re planning to use spreadsheets, you’ll need to make sure they are compatible with your chosen software and HMRC’s API so that information can be passed back and forth seamlessly.
What Records Do I Need to Keep?
When MTD comes into effect in April 2019, businesses will be required to keep the following digital records:
- Designatory data. Business name; address; VAT registration number; details of any VAT accounting schemes used by your company.
- Data for supplies made and received. For each supply you make, you must record the time, value, and rate of VAT charged. For each supply you receive, you must record the time, value (including any VAT that you cannot claim), plus the amount of claimable input tax. If you make several supplies at once – or if you receive several supplies – you do not have to record these separately. You will also need to record outputs value and inputs value for the period split between: standard rate; reduced rate; zero rate; exempt; and outside the scope outputs/inputs.
- VAT account. In your electronic VAT account, you will need to record total output tax amounts, including: the amount due for the VAT return period; output tax on received supplies (i.e. the amount you need to pay on behalf of your supplier under a reverse charge procedure); and output tax on acquisitions from EU member states. You will also need to record input tax amounts, including: the amount allowable for the VAT return period; and input tax allowable on acquisitions from EU member states. In addition, you’ll need to keep details of any adjustments and corrections.
You must maintain these records for six years (10 years if your business uses VATMOSS).
Do I Have to Hire an Accountant?
Though these changes will necessitate that you keep and deliver information in a different way, if you’re used to handling your own tax affairs, you don’t necessarily need to enlist the services of an accountant in order to be compliant.
However, it’s highly advisable to seek advice before MTD come into force. As this is a new initiative, things are changing all the time – implementation of MTD was initially intended to take place in 2018, for example, but the plans have since been pushed back and altered – and an accountant will be fully apprised of all HMRC announcements and familiar with forthcoming legislation. You may wish to consult a specialist tax adviser, too, to make sure you’re fully prepared for the upcoming changes and have an efficient, effective tax strategy in place.
If you’re interested in taking advantage of any of the services listed above, don’t hesitate to contact IBISS & Co today. Our diverse team comprises experienced accountants and expert tax advisers – meaning that when it comes to digital tax planning, we’ve got all bases covered.