MAKING TAX DIGITAL
Understanding HMRCs new tax system
Making Tax Digital is an HMRC initiative designed to make sure the UK tax system is effective, efficient and easier for taxpayers.
Making Tax Digital for VAT makes it mandatory for VAT-registered businesses above the £85k threshold to keep records and submit VAT returns digitally using HMRC-recognised MTD software.
The Government confirmed in their Spring Statement that Making Tax Digital will not be extended for any new taxes or businesses in 2020.
Making Tax Digital for business
Making Tax Digital only affects VAT-registered businesses – but eventually, all businesses will have to comply. Here's what the different phases mean for businesses across the UK.
Making Tax Digital for VAT
VAT-registered businesses with taxable turnover above the VAT registration threshold (£85,000 currently) now need to keep digital records and send digital VAT returns. For lots of businesses, this means from accounting periods starting on or after the 1 April 2019 Making Tax Digital deadline.
If your business has a taxable turnover below the VAT threshold, you can still sign up to Making Tax Digital voluntarily. HMRC encourages this, claiming the software will help you "better understand how your business is performing."
HMRC say the digital records you need to keep include:
business name and contact details
VAT number and details of any schemes used
VAT on supplies made and received
adjustments to returns
time of supply (tax point)
rate of VAT charged on supplies made
reverse charge transactions (if your software doesn't record them, you need to record them twice as a supply made and a supply received)
daily gross takings (DGT) if you use a retail scheme
purchases of assets you can reclaim tax on if you use the Flat Rate Scheme
value of sales made and total output tax on Gold Accounting Scheme purchases (if applicable)
documents covering multiple supplies made or received on behalf of your business (by volunteers, third party businesses or employees)
You should use compatible software to submit your returns (see examples of compatible software below). This will pull information from your digital records, which need to be preserved for up to six years.
You can use spreadsheets to calculate or summarise VAT transactions and work out what information you need to send to HMRC. But ultimately you'll need to use compatible software to send that information. You might also need what HMRC calls 'bridging software', which converts your records to the right format before you submit.
Making Tax Digital for individuals (Income Tax)
It's not compulsory (yet) but self-employed people and landlords can sign up for a digital tax returns pilot scheme.
The pilot lets you keep records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.
HMRC say this leads to a more real-time system and lets you see how much Income Tax you might owe as you go.
Both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) can sign up.
You'll need to use compatible software to keep records and send an income and expenses summary to HMRC every three months. You'll be able to see estimates of how much tax you'll owe.
At the end of the accounting year, you'll send a final report and your tax for the year will be calculated. This is the point at which you'll claim any allowances and reliefs.
Making Tax Digital software
Businesses will need to use compatible software to send digital tax returns. Your digital records don't all have to be in one place, but HMRC wants data to flow and be exchanged digitally between applications by 31 March 2020. Until then you can use copy and paste to transfer information.
FREQUENTLY ASKED QUESTIONS
WHAT IS MAKING TAX DIGITAL?
Originally announced in the spring 2015 Budget, the MTD initiative will enhance the use of digital data to modernise the UK tax system by 2020, thus making HMRC the most efficient tax authority in the world.
WHAT IS A DIGITAL TAX ACCOUNT?
HMRC is replacing tax returns with digital tax accounts for millions of businesses and individuals. A digital tax account brings together each taxpayer’s details in one place, just like an online bank account. Taxpayers will be able to view their tax affairs in real time, update their information, register for new services, see at-a-glance how their tax is calculated, and choose payment options.
WHAT IS THE TIMELINE FOR MAKING TAX DIGITAL?
What is the timeline for Making Tax Digital?
This is the latest Making Tax Digital timeline, announced by HMRC on 13 July 2017:
From April 2019, quarterly reporting is:
Mandatory for VAT for all VAT-registered businesses with a turnover above the VAT registration threshold (£85,000)
Optional for VAT-registered businesses with a turnover below the VAT registration threshold (£85,000)
From April 2020 (at the earliest), quarterly reporting is:
Mandatory for income tax and corporate tax (as appropriate) for all businesses (including landlords) with a turnover over the VAT registration threshold (£85,000)
Optional for businesses (including landlords) with a turnover below the VAT registration threshold (£85,000)
IS MAKING TAX DIGITAL CANCELLED?
The simple answer is no. Making Tax Digital is more than just quarterly reporting. Quarterly reporting was an unpopular aspect of the programme that received the majority of press coverage, but MTD has many benefits to offer accountants and their clients.
As HMRC continue to digitise their tax records, Thomson Reuters customers will be able to use our software to access near-live client data to get a full view of their tax affairs.
Today, submitting a Self Assessment tax return to HMRC is a one-way process with little value beyond compliance.
In the future, MTD will enable a more holistic approach to managing a client’s tax affairs, providing awareness of business events as they happen and offering relevant advice.
WHAT DOES QUARTERLY REPORTING MEAN FOR VAT-REGISTERED BUSINESSES?
It should be noted that the vast majority of VAT-registered businesses already report quarterly for VAT today, and so, other than a technical change in April 2019 to the actual method or reporting, the data reported and frequency of report is unlikely to change for most businesses.
WHAT ABOUT ‘DIGITAL RECORD KEEPING’?
Only those businesses with an obligation to file quarterly (VAT-registered businesses with a turnover over the threshold) are obliged to keep digital records. For all other businesses, this becomes optional.
WHAT DOES THE DEFERRAL OF MAKING TAX DIGITAL MEAN FOR ACCOUNTANTS?
There has been concern that quarterly reporting would be a time-consuming struggle, particularly for smaller businesses, accountants, and their clients. Professional bodies, treasury select committees, and other organisations canvassed government to get the timeline for MTD eased, and the deferral has been widely welcomed by the accounting industry.
WILL HMRC CONTINUE TO PROVIDE A VAT SOLUTION FOR MTD?
It is unclear whether they intend to continue providing a VAT solution under MTD. For quarterly reporting of income tax, HMRC stated that they were not going to continue to provide their own software.