What is Making Tax Digital (MTD)?
Making Tax Digital, known as MTD, is a Government initiative to simplify the UK tax system and make the recording and reporting of taxes easier for businesses.
It will require all businesses who meet the set criteria to move towards maintaining their taxes and records in a digital format.
What’s the point of MTD?
HMRC estimates that the Tax Gap – the difference between what they expect to receive and what they actually get – is around £9 billion a year. Making Tax Digital aims to reduce, if not eliminate, that gap.
Under the new system, tax recording should be more accurate, with fewer opportunities for error or fraud to occur, either deliberately or not.
The process is designed to be faster and more automated for businesses, saving them time and effort in getting their tax obligations correct, and hence the time HMRC has to spend on investigations.
Who is affected by MTD?
For now, it is only those VAT registered businesses with annual turnover above £85,000 that need to take action. From the 1stApril 2019, they will have to report VAT under the MTD system.
Following the Brexit deal delay, there were calls for the MTD proposals to also be put back, and although Making Tax Digital for corporation tax and income tax has been delayed until at least beyond 2020, the deadline for MTD for VAT remain unchanged so if you are VAT registered with vatable turnover of above £85,000 then you must take action.
What do I have to do for MTD?
For any VAT periods starting on or after 1st April 2019 you will have to use MTD compatible software to file your VAT returns and you will need to maintain your records digitally.
Spreadsheets and filing cabinets of invoices will no longer meet your responsibilities, so if you are not already using MTD compatible software or storing records digitally, then you will need to make a change to how you do things.
At the time of writing there are less than three months that you have to be ready for MTD, which may sound like a long time, but in reality, it is only VAT quarters. You will need to allow time for the changeover, perhaps consulting your accountant and bookkeeper about the installation of new software and processes, and getting used to the new way of doing things.
Why you should see it as a good thing
Any change can be painful, especially when it’s made at someone else’s request at a time when you don’t want to do it. But now is the time to embrace digital technology change and see this as a chance to modernise your business.
Banks are reducing services as more people use online banking, and the high street is suffering as more and more people shop online. As more businesses move their accounting software online what do you think will happen to you if you don’t? When your customers and suppliers can create and send invoices from anywhere but you can’t? When they can pull up information on their phone at the click of a button but you can’t? You will be left behind like everyone else who ignored, or worst still, fought against change.
Yes, it might be a pain, and yes it might cost some time and money, but in the long run you will see efficiencies that far out weigh those issues.
What happens if I ignore it?
Like with any other obligation to HMRC, if you ignore it, they will come after you and impose penalties.
Exactly what those will be are currently under review, but HMRC has said that it will be using a points-based penalty system whereby accumulating a certain amount of points for failures will equate to a certain penalty – be it interest or a fixed charge.
Our advice is not to wait to find out, and make the necessary steps to get MTD ready now!
What have HMRC done about it?
Unfortunately, HMRC have not been great at getting the news out there to the businesses it affects or telling them what they need to do. At a Lords Committee just 6 months before the MTD deadline, HMRC were criticised for their actions with less than 15% of the businesses it affected ready for MTD.
The Sub-committee was attended by members of the Federation of Small Businesses (FSB), the CEO of the Iris accounting software group and the Tax Director from the Office of Tax Simplification (OTS), and they had some worrying information to give.
Paul Morton of the OTS said that ‘Less than 30% of businesses are confident that they understand what is required and less than 15% of businesses say that they are prepared. Some people have commented that they will deregister from VAT if they registered voluntarily or reduce their activities in order to deregister if they were registered.’
More worryingly was the fact that only 85% of agents – accountants, tax advisers and bookkeepers – knew what was required. That means that 15% of agents do not know what is required, and if 85% do know what is required, why are less that 15% of their clients ready for it? That’s a big gap between those that know and those that are ready – has your adviser told you what needs to be done?
Mike Cherry of the FSB said that some businesses were not making the necessary changes due to the timing of the roll-out. Most businesses that do so will change their accounting software at the end of their financial year or VAT quarter and the 1st April deadline does not coincide with that for them.
Making Tax Digital was first announced in the 2015 budget so the Committee questioned why so many were unaware or not ready for the upcoming deadline, and the blame for that was firmly laid at the feet of HMRC for their lack of useful and timely information provided to businesses.
However, as much as you may like to, you will not be able to blame HMRC if you should you not be ready. You need to get your business prepared for Making Tax Digital and there are now at most two VAT quarters between here and the deadline.
What happens next?
HMRC have begun the process of writing to businesses who it thinks will be affected by the change and informing them of the deadline. At the moment, HMRC is pretty vague about exactly when things will go live, but it appears that the intention will be for the pilot scheme to be turned on in the next four weeks.
It looks as though it will be up to businesses themselves to confirm with HMRC that MTD rules apply to them and that they are reporting under them. If you are already using MTD compatible software then it appears this will be the only action you will need to take, although each software will likely have little tweaks to what you are used to in order to be compliant.
What systems should I use?
There is a list of MTD compatible software for you here to see if you are already using an allowable system. If your system does not appear on the list then we recommend that you contact your software provider directly to see if they will be compatible and approved by HMRC in time for the deadline.
If you are using an older version of a desktop software then it is likely that you will need to pay for an upgrade to the latest version to deal with VAT under MTD rules.
ReceiptBank is a scanning software that extracts the necessary data from your purchase invoice and receipts, storing a digital copy you can access from anywhere, before sending it across to Xero which in turn calculates your VAT obligations for you, and then files your VAT return directly with HMRC under MTD rules.