Updated: Sep 26, 2019
I was listening to a podcast about Making Tax Digital this morning, not everybody’s idea of fun, but certainly relevant for me. We’ve been building up to the launch of MTD for years, but it occurred to me that despite being only six months away for some businesses, many of my clients probably haven’t even heard of it.
I heard a pretty shocking statistic and this will give a lot of context to why HMRC are pushing ahead with MTD. Apparently HMRC miss out on £9.4bn of tax revenue each year because of errors made by businesses and individuals when reporting their tax, so it makes sense that HMRC are bringing in MTD to digitise tax returns to try to close that gap.
What is Making Tax Digital?
Put simply, Making Tax Digital is going to make tax digital. HMRC want to digitise the way businesses keep their accounting records and how they submit their business tax returns and in the future they'll require businesses to use “MTD Compliant Software”. If you run a business or submit a tax return, you'll be familiar with Government Gateway. Currently most businesses submit their various tax returns to HMRC through the Government Gateway but MTD is going to close down Government Gateway and businesses will be required to submit returns via approved software instead.
What does MTD mean for me?
Ultimately this means that over the next few years, all businesses will need to be set up with and submitting their various tax returns through cloud based accounting software of which there is an approved list on HMRC’s website. All accounting records will need to be held electronically as well.
When will MTD start?
HMRC have been building up to this point for a long time and MTD is going to be phased in gradually starting with VAT returns for businesses with turnover exceeding £85,000 for the first quarter starting on or after 1 April 2019. That means if your business has VAT quarters which tie in with the usual calendar quarters (March, June, September, December), you’ll be submitting your first MTD compliant VAT return in the quarter ended 30 June 2019.
Which tax returns will be affected by MTD?
The first focus for MTD will be VAT returns for businesses over the VAT threshold of £85,000. It doesn’t matter whether you’re a sole trader, partnership, limited company, charity or any other business type, MTD will apply if you meet those criteria. Income tax and corporation tax will follow next with the scheduled start date likely being April 2020. It’s likely that HMRC will also extend MTD for VAT to businesses under the VAT threshold at this date too.
Is my software MTD Compliant?
HMRC have published a list of software suppliers who will be ready for MTD. The majority of my clients use QuickBooks, FreeAgent and Xero and these packages are ready for the MTD VAT requirements in April 2019.
If I’m already using this software, do I need to worry?
If you’re already using MTD compliant software, you’re in a great place. You shouldn’t have any problem filing direct to HMRC from the software and I’d suggest running your next VAT return from the software if applicable to ensure everything is set up and in place ahead of the April 19 start date.
How easy is it to get started with MTD compliant software?
If you will need to move from your current process, whether it’s paper based, on a spreadsheet or on another desktop software system, it makes sense to start thinking about that move to cloud based accounting software now so that you’re ready for your MTD deadlines. The best time to set up a new software package is at the end of the financial year, or at a VAT quarter end if you must make the change mid-year. A good bookkeeper or accountant will be able to set you up with an accounting system which will be MTD compliant, and show you how to use it.
Are there any exceptions?
There are likely to be some deferrals to the start date for some more complex businesses, and some exemptions for people who can’t comply for some religious, disability and location reasons but the exemptions are few and far between. MTD will apply to almost every business eventually and if you have any doubt about whether MTD will apply to you, you should speak to HMRC or to your bookkeeper or accountant.
What if I don’t comply?
There will be penalties for failing to comply with MTD, at the moment it looks like there will be a points based system whereby a certain number of points results in a certain financial penalty but the details haven’t been completely ironed out yet.
If you have any questions about what Making Tax Digital means for you and your business, please get in touch.