Making Tax Digital for VAT (MTDfV) may have arrived, but for some HMRC’s wider Making Tax Digital (MTD) initiative is still shrouded in confusion.
From uncertainty concerning when, or whether it will affect your business to the mystery of what functionally compatible software is, we aim to answer any nagging questions here…
It’s here! In a little over four years since it was first announced MTD is underway. However, HMRC’s plan to make the tax system more like online banking hasn’t all gone smoothly. Indeed, many accounting technicians and small businesses may be feeling a little confused. Why aren’t all businesses using MTD? Do I need to shift to new software? And can I still use the spreadsheets I’ve loved for so long? These questions, and many more, are answered here…
Remind me, what is Making Tax Digital again?
MTD is the bedrock on which HMRC is seeking to achieving its ambition to become one of the most digitally advanced tax administrations in the world.
As you’ve probably guessed from its name, under MTD taxpayers will switch to a digital-by default method of interacting with HMRC. As part of this process businesses will be required to record all monetary transactions using MTD-compliant accounting software.
By moving everything online, HMRC aims to make tax admin more efficient and less complicated: no more spending endless hours form-filling, no more jotting down expenses on random scraps of paper and no more keeping receipts in a bag. Yes, you read that right. Apparehttps://www.xero.com/blog/2019/02/mtd-debunking-the-myths-for-businesses/ntly, hoarding receipts in a bag is something one-third of small businesses do, according to Xero.
HMRC has calculated that by requiring taxpayers to digitally record their business transaction in near real-time the level of careless error and mistakes in the UK tax system will be greatly reduced, enabling the Exchequer to benefit by up to £9bn a year.
How does it work?
Under MTD, more than 3.6 m small businesses and landlords will be required to keep digital records and digitally transmit to HMRC updates on their income and expenditure at least four times a year for income tax purposes. This part of the launch of MTD is known as Making Tax Digital for Business (MTDfB).
It’ll be good news for any accountant whose customers regularly gripe about sky-high end-of-year tax bills. Because tax information will now be collected and processed in real-time, these customers won’t have to wait until January to find out how much tax they owe. Keeping track of what they owe will also help them budget for tax better, hopefully making accountants’ lives a little easier too.
If MTD launched in April, why are neither me or my clients using it at the moment?
After a series of setbacks not of HMRC’s making, Mel Stride the Minister responsible for MTDs roll out announced to the business community in July 2017 that instead of MTDfB being starting in April 2018 it wouldn’t be made mandatory until April 2020 at the earliest.
However, from the 1 April 2019, VAT registered businesses with a VAT-taxable turnover above the compulsorily VAT registration threshold would be legally required to keep their VAT records digitally, and file MTD-compliant VAT returns using HMRC recognised MTD-compatible software.
There’s a minority of businesses, with more complex VAT affairs such as, not-for-profit organisations, VAT groups, UK VAT registered overseas traders that have had their MTDfV start date deferred until the first full VAT period starting on or after 1 October 2019.
Aside from this, there are a small number of sole traders and landlords who have joined HMRC’s limited MTDfV income tax pilot and are keeping their records digitally and sending quarterly updates of their income and expenditure, as part of a live testing phase.
While it was originally suggested that if the first stage of MTDfV proved successful there would be further MTD related mandation from April 2020, this is no longer the government’s position. During the Chancellor’s 2019 Spring Statement Phillip Hammond announced there would be no widening of MTD’s remit until April 2021 at the earliest.
Is there anything I should be doing right now?
Yes! If you have already done this, you can start by getting acquainted with MTDfV and ensuring all your customers are up-to-speed too. It’s also worth checking whether your current software is MTD-compliant or not.
You mentioned software. What software do I need?
To keep digital records and submit tax returns (VAT or otherwise), you’ll need MTD-compatible software. HMRC isn’t providing its own software for this, but there’s a list of MTD-compatible software and apps in this list here.
If you are a licensed accountant you’ll need to set up an HMRC Agent Services Account [ASA]. An ASA is essential for submitting MTD VAT returns, plus it’ll allow you to access HMRC online services and communicate directly with them. More details here.
Can’t give up spreadsheets? You can still use these under Making Tax Digital, but HMRC has said any spreadsheet-fans will need to submit the data to them digitally. The easiest way to do this is by using bridging software or an API-enabled spreadsheet that can integrate with HMRC’s systems. Again, search for compatible bridging software here.
I’m worried many of my clients will never be MTD-ready. What can I do to cajole them?
Back in March, with just weeks to go before MTD was launched, a British Chambers of Commerce survey found 19 per cent of companies who were required to take part in MTD had never heard of it. However, since then take-up has been steadily increasing, and now over 270,000 businesses have enrolled into MTDfV and over 140,000 MTD-compliant VAT returns have been filed.
As an AAT member you can play your part in driving up awareness bv giving your employers a gentle reminder (or three), or if you’re a licensed accountant you might want to segment your client list to identify which clients are affected by MTDfV before contacting them. It’s also worth getting in touch with any non-VAT-paying clients too. Think of it as a nudge for them to stay on top of their books in time for 2021.
If you’ve got your own practice, you could start marketing yourself as MTD-ready, maybe by uploading an MTD-ready logo to your website or alerting others via your social media posts.
Remember: some of your clients may be exempt from MTD, such as the ‘digitally excluded’ (those who are largely offline due to reasons such as religion, age, disability or remoteness).
What happens if I or my customer can’t comply?
While for those who deliberately do not engage with MTDfV there will be penalties (gulp), HMRC has said that for the first year following the launch of MTDfV there will be a “soft landing period”. Whereby penalties will not be imposed on any VAT registered entity that has tried to comply but due to technical issue has been prevented from meeting all of HMRC’s MTD requirements.
HMRC is keen to stress, to avoid incurring a penalty, it is vital that in instances where a business has been prevented from filing an MTD-compliant VAT return by the due date it must ensure that HMRC receive payment of any VAT liability by the due date.
What else should I know?
Try to think of Making Tax Digital as a business opportunity. It’s a great way to bring in new clients, plus it gives you the perfect excuse to update your current software. You could even change your pricing too. According to cloud accounting software firm FreeAgent (note: other MTD-compatible software is available) many accountants are now charging monthly rates rather than an annual fee, to cater for their customers who’ll be submitting tax info more regularly.
For more info on Maxing Tax Digital, check out the AAT’s Making Tax Digital centre here.
Christian Koch is a contributor for AAT's members magazine, AT.