The Government will soon begin implementing its landmark Making Tax Digital (MTD) regime, which will see the UK adopt a fully digital tax system over the coming years.
Described as the biggest change to the UK tax system since the introduction of Pay-as-you-Earn in 1944, how could it affect you and your business?
MTD for Businesses
MTD was originally due to be launched in 2018 and phased in over two years. However, a number of delays have led to the Government revising the timescale and scope for the introduction of MTD.
From 1 April 2019, businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records for VAT purposes and provide this information to HMRC using MTD compatible software. The MTD requirement will remain even if turnover subsequently falls below the VAT threshold.
Keeping digital records and making quarterly updates will not be made mandatory for taxes other than VAT before April 2020.
Similarly, those businesses below the VAT threshold which have voluntarily registered for VAT can opt in to MTD.
MTD for Individuals
Personal Tax Accounts (PTAs) have already been created by HMRC for the majority of taxpayers in the UK.
The accounts are pre-populated with information already held by HMRC from banks, PAYE and other sources.
PTAs are set to be developed further and taxpayers will be able to report any additional sources of income through their digital account.
Individuals may wish to register for a personal tax account by visiting www.gov.uk/personal-tax-account.
Thanks to PTAs many individuals with straightforward tax affairs may no longer need to complete an annual tax return.
The Government has included a number of exemptions within the legislation surrounding MTD. These include where HMRC is satisfied that the business:
- is run by a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications,
- or for which HMRC is satisfied that it is not reasonably practicable to make a return using an electronic return system for reasons of disability, age, remoteness of location or any other reason.
A business may also be exempt if it is subject to insolvency procedures. However, there are procedures that allow for the right of appeal against the refusal of an exemption by HMRC.
Preparing for MTD
In order to prepare for MTD businesses will need to incorporate some form of online accounting into their operation, as HMRC stipulates that businesses within the scope of MTD must use ‘functional compatible software’ to meet the new requirements.
HMRC permits the use of more than one piece of software to keep its digital records, but the programmes must be “digitally linked” and be able to connect to HMRC systems via an Application Programming Interface (API).
The software functionality must include:
- Keeping records in a digital form
- Preserving digital records in a digital form
- Creating a VAT return from the digital records held in functional compatible software and providing HMRC with this information digitally
- Providing HMRC with VAT data on a voluntary basis
- Receiving information from HMRC via the API platform that the business has complied.
Under the rules, businesses are required to submit summary totals of their digital records to HMRC at least every quarter.
Businesses within the initial scope of MTD for VAT will be required to submit their VAT returns using their compatible software. Information will then be pulled from the digital records to populate the VAT return.
Businesses submitting monthly or non-standard period returns will be able to continue to do so. Some businesses may choose to submit VAT information more frequently than their VAT return obligations require on a voluntary basis, while others may choose to voluntarily provide further information by way of periodic updates and supplementary data.
However frequently they choose to submit, Businesses must preserve digital records for up to six years.
Currently, 99 per cent of VAT returns are filed online, yet just 12 per cent of these returns are submitted using software, so this marks a significant change in the way in which companies will be required to handle their accounts and bookkeeping.
How our team can help
Whatever the size of your business, MTD will ultimately affect your firm in the future so it pays to be prepared.
Our team at Lamont Pridmore is working with a number of businesses to help them prepare for the new system ahead of the start date of April 2019.
Part of our approach is the promotion of existing online accounting platforms and our dedicated cloud accounting service.
To discuss how the MTD reforms may affect you and your business, please contact us.