MTD – Making Tax Digital – is the government’s scheme to get everyone, both individuals and businesses – to submit their tax returns digitally and on a quarterly basis. There’ll no longer be a paper system for anything, and it’s the death knell for self-assessment.
HMRC’s stated ambition with MTD is: ‘to become one of the most digitally advanced tax administrations in the world, modernising the tax system to make it more effective, more efficient and easier for customers to comply.’
That’s a bold aim, and one that on the surface, at least, seems to make sense. The tax system probably does need to be modernised, and anything that makes it easier to comply is surely a good thing. And since most of us probably already submit our returns online, maybe going fully digital won’t be such a challenge.
Where did this all come from?
MTD was initially introduced in the spring 2015 Budget, and was meant to be in place by April 2018. The biggest problem critics had with the scheme was that it seemed to be being rushed through, with insufficient time allowed for people to get to grips with what was required of them. There was also a lot of negative press coverage about the necessity for income tax returns to be submitted quarterly, not annually, which was seen to be a burden on those affected. As a result, it was announced last July that the switchover had been put back – to April 2019 – and that initially MTD would be introduced for VAT reporting only.
The timeline is now:
April 2019 – quarterly reporting for VAT via MTD becomes:
- mandatory 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)
April 2020 (or later) – quarterly reporting for income tax and corporate tax via MTD becomes:
- mandatory for all businesses with a turnover over the VAT registration threshold (£85,000)
- optional for businesses with a turnover below the VAT registration threshold (£85,000)
How will MTD for VAT affect me and my business?
If your business turnover is above the VAT threshold, then you need to make sure your systems are compliant for April 2019. That means you need to start getting organised now.
If your business turnover is below the VAT registration threshold –even if you have voluntarily registered for VAT – then nothing changes for you just yet. But, registered or not, you can opt in to the new system if you wish, so you may want to read on and make some plans.
How will MTD for VAT work?
Let’s first look at how the scheme is similar. Bearing in mind VAT has been online since 2010, it’s probably no surprise that more than 98 per cent of businesses submit their VAT return online. Most also already submit information on a quarterly basis.
When it comes to MTD, however, there’s a fundamental difference. HMRC is replacing the old system of submitting a return with a system whereby businesses and people have a digital tax account.
The purpose of this is to make things easier, both for us and for them. For us, it will be easier to see how tax is calculated, and we’ll be able to select payment options and make changes to the services we get from HMRC. For them, the system will be less onerous to operate and tax will be easier to collect. They also claim that tax will be calculated more accurately.
When it comes to submitting information to HMRC via the new system, there’s another big change: MTD requires digital systems to link up.
Wait … what?
The scheme hinges on the use of ‘functional compatible software’ that allows digital information to flow automatically from your accounting system to your digital tax account. And not just your systems – information about certain bank transactions, for example, will also automatically be updated to your digital tax account. (You’ll get the chance to check this information for accuracy before it’s submitted to HMRC.)
The software you use to record and store VAT-related information will report that data to HMRC, and HMRC will also have the ability to send information back to you. Desktop accounting software on its own won’t do the job; you’ll need online capability. (HMRC will provide an app, but as yet we don’t know what that will look like. Their preference seems to be that people get compatible online accounting software.)
How often do I have to update information?
The VAT data doesn’t have to be recorded in real time; it just needs to be input into the system in time for the VAT return.
Depending on the software you decide to use, it may be that some of the data will be updated automatically from other systems you operate. That could save you time.
Also, a business can use more than one type of software to record information, so any existing systems you have that work well don’t necessarily need to change. However, they must be ‘digitally linked’. Going by an example provided by HMRC, it seems this can be as simple as transferring figures from desktop software that isn’t linked to HMRC into the data recorded in the online software that is.
If your business has a turnover above the VAT threshold, you need to make sure that your accounts system complies with MTD for VAT by April 2019.
Once MTD for VAT has been launched in April 2019, the scheme won’t be rolled out any further until it’s been shown to work effectively. And, even if it hits the ground running, there will be no further changes prior to April 2020 at the earliest. But you will at some point in the future also need to submit income and corporate tax returns digitally and on a quarterly basis.
If the thought of all this fills you with dread, we get it. Change is a pain. You just seem to get to grips with one set of requirements when something else comes in. And no one wants to fall foul of the system!
If that sounds like you, get in touch. We can guide you through what you need to do in your business to be ready, and we can help you make sure your accounting systems will comply with the new MTD for VAT requirements before they kick in, in April 2019.