Making Tax Digital (MTD) is a key part of UK Government’s vision to digitalise the UK tax system. For businesses and landlords in general, it means that they will need to maintain their accounting records digitally and to update HMRC on a quarterly basis.
According to HMRC, the driver behind the change is to help businesses get ‘their tax right’ and reduce the amount of tax loss from avoidable taxpayer errors, estimated at over £9 billion a year. The reforms are anticipated to take out around 10% of error on an ongoing basis. It is also suggested that the changes will give businesses a clearer view of their tax position, in year, and enable them to plan to meet their tax obligations at minimum cost and disruption.
From 1 April 2019 businesses that are VAT registered and have turnover above the VAT registration threshold of £85,000 will be required to keep digital records and submit their return to HMRC via MTD compatible software. VAT registered businesses with turnover below the threshold can continue to file their VAT Returns as they do currently until at least 2020.
The requirement to keep digital records does not extend to invoices and receipts and HMRC have confirmed businesses can continue to keep documents in paper form, however, the underlining transactions will need to be stored digitally. Whilst it will only be mandatory to submit the nine figures contained within the return, HMRC can separately request the underlying data in order to validate returns.
For many businesses the changes will require them to review and possibly upgrade their current existing accounting systems. Those businesses that currently maintain their records on paper will need to ensure the additional information is captured and entered onto spreadsheets and linked to HMRC’s system using Application Program Interface (API) or commercial software.
The government has announced it will not widen the scope of MTD beyond VAT before the system has been shown to work and sufficient time has elapsed to allow the system to be fully tested. However, in the longer term, the potential impact on individuals and businesses of full implementation of the original MTD roadmap would be a move away from the current system of filing an annual Self-Assessment or Corporation Tax return, to a system of additional ongoing reporting to HMRC. It is proposed that MTD will require businesses and landlords to update the accounting records on a quarterly basis, and to submit a summary to HMRC within one month of the quarter end. A possible fifth and final year-end report may be required.
Businesses that rely on their accountants and the traditional annual process of gathering together information to prepare accounts and submit tax returns, now face significant change to meet the quarterly reporting requirements of MTD.
April 2019 is fast approaching so now is the time to think about what your business needs in order to be ready for MTD.