Implementing Making Tax Digital
Making Tax Digital is the HMRC’s vision to digitise the UK tax system and it is well underway. Businesses and landlords will soon be required to use commercial software to maintain their records and to update HMRC quarterly and this will start with VAT from April 2019.
Basic Timeline (as of Jan 2018)
Tranche 1 from April 2019: VAT reporting by all VAT registered businesses with turnover above the VAT threshold (£85,000 currently). DO NOTE that of course this is at the time of the proposed UK exit from the EU so is almost certain to cause a large amount of confusion…..
Tranche 2 from April 2020 (at the earliest): Income Tax and Corporation Tax
From April 2019 all VAT registered businesses with turnover above the VAT threshold will be required to maintain digital records and will need to send their VAT information to HMRC using third party commercial software. HMRC’s online portal will remain available to all other businesses that complete a VAT return but have turnover below the VAT threshold. This includes unincorporated businesses (sole traders and partnerships), LLP’s, companies and charities. If a business is VAT registered but has turnover below the VAT threshold then they have the option to opt in and file electronically if they choose to do so.
Is there any further information?
The start date: currently applies to the first VAT return period starting on or after 1st April 2019 so should be the first VAT return period ending 30th June for most businesses. You should of course be very careful of any short VAT periods that start during that transition period.
Exemptions: The exemptions that currently apply for electronic VAT filing will be extended to cover MTD for VAT. There will be an automatic exemption for businesses which are registered for VAT but have turnover below the threshold. These businesses must elect for the exemption not to apply if they wish to submit their VAT information under MTD.
Free software: There will be no free software available via HMRC for VAT. HMRC says it is working closely with software providers to ensure a range of suitable products will be available.
Software requirements The commercial software used must be capable of:
• Keeping records in a digital form
• Preserving digital records
• Create a VAT return from the digital records
• Provide HMRC with VAT data on a voluntary basis
• Receive data from HMRC via the API allowing 2 way communication between HMRC and the business/agent
Spreadsheets The use of spreadsheets will be permitted but they will need to be combined with other third-party commercial software using API’s to ensure a seamless flow of data from the business to HMRC and vice versa.
Digital Record Keeping requirements HMRC has confirmed that the requirement to keep digital records does not meant that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer but the transactions will need to be stored digitally. HMRC have further stated that the following records will need to be kept digitally:
• Your business name
• The address of your principal place of business
• Your VAT registration number
• A record of any VAT accounting schemes that you use
For each supply that is made you must record
• The time of the supply
• The value of the supply
• The rate of VAT charged
If you make multiple supplies at the same time these do not need to be recorded separately. You can record the total value of supplies on each invoice or receipt that have the same time of supply and rate of VAT charged. You must also have a record of output values for the period split between standard rate, reduced rate, zero rate, exempt and out outside scope inputs.
For each supply you receive you must record
• The time of the supply
• The value of the supply excluding any VAT that is not claimable by you
• The amount of input tax that you will claim
If more than one supply is on an invoice you can record the totals from the invoice.
The VAT account is the link between the business records and the VAT return. Under MTD for VAT, the information required to be held in the VAT account must be kept digitally (referred to as your electronic account) and the information in that electronic account will be used by compatible software to calculate and fill in your VAT return.
To show the link between the output tax in your records and the output tax on the return, you must have a record of:
• the output tax you owe on sales
• the output tax you owe on acquisitions from other EU member states
• the tax you are required to pay on behalf of your supplier under a reverse charge procedure
• the tax that needs to be paid following a correction or error adjustment
• any other adjustment required by VAT rules
To show the link between the input tax in your records and the input tax on your return you must have a record of:
• the input tax you are entitled to claim from business purchases
• the input tax allowable on acquisitions from other EU member states
• the tax that you are entitled to reclaim following a correction or error adjustment
• any other necessary adjustment
Records must be kept for six years (and indeed ten years if you use VAT MOSS) and digital records will need to be maintained for six years following deregistration.
Monthly and non-standard returns
Businesses will still be able to submit monthly and non-standard returns under MTD.
Business can, if they wish provide, provide information more frequently than quarterly
Flat rate scheme
Business will still be able to use the flat rate scheme under MTD meaning digital records of purchase invoices will not be needed (unless they relate to capital items costing more than £2,000 including VAT).
Annual accounting scheme
Users of the annual accounting scheme will continue to send in one annual VAT return rather than quarterly reports under MTD.
Retailers will be able to record daily gross takings rather than each individual transaction.
The existing error correction rules will apply under MTD. In some cases amendments can be made through the MTD compatible software as currently.
Individuals with property income will be required to comply with MTD requirements. For jointly owned property, each individual must make a digital record for their share of income and expenditure. It does appear that Furnished Holiday Lettings fall outside this requirement currently but as ever, we expect everything to change!
We also understand that further to consultation, HMRC has decided that a digital record will be required for a property business as a whole rather than property by property. We are waiting for further information about different types of property businesses and how this will work.
The HMRC is constantly updating their advice so check back on this page regularly and check out their MTD summary page here as well!
We are helping to ensure our clients all ready for Making Tax Digital right now. Contact us if you need any help with this complex area as leaving it until the start date will cause a lot of stress, worry and work to implement it and ensure you avoid the penalties that HMRC are always keen on applying.