Making tax digital explained

Making Tax Digital (MTD) is a government initiative that will eventually move virtually all tax/NIC management and payment online. It mandates digital record keeping and automated filing. This will require the use of compliant software.

What MTD really means

The government has said it believes introducing a new digital tax system is the right direction in which to move, although it has recently revised its plans significantly.

Previously most businesses were to be included within the move to MTD by April 2019. This has now changed. In the draft Finance Bill (2017) the government announced the implementation of MTD is to be scaled-back in the short-term, as follows:

  • Only VAT-registered businesses with a turnover above the VAT threshold will need to keep digital records—but only for VAT purposes and only from April 2019;
  • Other businesses will not be asked to keep digital records or update HMRC quarterly for other taxes—primarily income tax and corporation tax—until April 2020 at the earliest, pending further government announcements;
  • Voluntary submissions for income tax will be accepted prior to April 2020—although once again firm details are yet to be made available.

Who is exempt from MTD?

HMRC has stated there will be exemptions for some organisations including:

  • Prior to April 2020 – VAT-registered businesses where turnover is below the VAT threshold (currently £85,000);
  • Charities and Community Amateur Sports Clubs (CASC);
  • HMRC will provide non-digital alternative channels for those considered digitally exempt. This includes those with protected characteristics under the Equality Act who fall into the ‘digitally excluded’ legislative definition,* and also:
    oPersons who cannot get online through reasons of disability, age, remoteness of location or other reasons;
    oPersons who practice religious beliefs that are incompatible with the use of electronic communications.

Important things to note about MTD

There are some things that might catch out the unwary when implementing MTD.

Following implementation of MTD for VAT in April 2019, HMRC will not provide the tools for digital record keeping and submission for VAT. This functionality will only be offered through commercial software providers. Following the proposed inclusion of other types of business tax in 2020, the government will again require the use of software.

This means that submission of VAT returns from 1 April 2019 can only be made through compliant software. The current facility of submitting VAT returns through the HMRC website will not be available from 1 April 2019.

Quarterly updates
Updates to HMRC need to be made at least quarterly.

Opting out
Once you start reporting VAT under MTD there is no option to opt out again, even if circumstances change – for example, if turnover falls below the VAT threshold. Additionally, if a business voluntarily opts in for MTD, they will not have the option to opt out again.

Collecting Data
To make life easier, standing data such VAT registration number, business name and address, and VAT accounting scheme, will be collected at the registration point of Making Tax Digital, so won’t need to be submitted with each update unless there is a change to this information.

What you need to do
Making Tax Digital applies from 1 April 2019 to all businesses who are VAT registered with a turnover above the VAT threshold.

From this date you must keep your records in digital format and submit your VAT returns digitally using compliant software. The previous facility of entering the VAT return details directly through HMRC website will not be available from 1 April 2019.

How we can help
Dragon Accounting Services use HMRC approved fully compliant digital tax software.

If you are considering outsourcing your accounts and/or payroll function we would be happy to tailor a cost effective solution to meet your requirements. Contact us to find out more.