Making Tax Digital (MTD) is a bold government initiative aimed at making the tax system entirely digital, that will essentially make it easier for individuals and businesses to keep on top of their taxes and keep their tax calculations accurate. It is aimed at making tax administration more effective, more efficient and easier for taxpayers to navigate through the implementation of fully digital tax software.
MTD was announced in 2017 and its aim was to bring the tax system into the 21st century by providing a modern and streamlined system for businesses and individuals to keep their tax records and also provide information to Her Majesty’s Revenue and Customs (HRMC), which is responsible for the collection of taxes in the United Kingdom.
Making Tax Digital for VAT was scheduled to come into effect in April 2019. From April 2019, businesses above the VAT threshold of £85,000 are required to provide their VAT information to HRMC through the Making Tax Digital Software. Businesses under the mandatory VAT threshold are allowed to decide on whether or not they would like to opt in to the Making Tax Digital VAT software, although by 2020 it will be compulsory for them too. They were also given the choice on whether to keep digital records of their taxes and VAT until at least 2020.
Making Tax Digital for VAT involves the digital record keeping and quarterly submissions of business tax records to HRMC direct from the business VAT accounting software.
MTD for VAT has brought changes to the nature and structure of tax revenue payment and collection in the United Kingdom. Businesses over the VAT threshold are now required to digitally pay for and record their tax revenue using the VAT accounting software. These businesses include many Small to Medium Enterprises (SMEs).
If you are one of the businesses who has recently been brought into MTD, or you are due to come into it soon, here are seven things you should about Making Tax Digital:
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WHO IT APPLIES TO
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Implemented in 2019, MTD for VAT applies to businesses in the United Kingdom with an income above the VAT threshold of £85,000 and this includes a large number of SMEs. Businesses under this VAT threshold can choose to voluntarily opt in, however if you forecast that your business may earn over £85,000 in VAT in the next 12 months, then you should begin to prepare to change by gathering new information digitally in compliance with the new guidelines.
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WHAT SOFTWARE IS REQUIRED
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While your business may already be using an accounting software solution, it is important to confirm that this accounting solution is compliant with MTD and to change it to one that is, if it isn’t. To confirm if your accounting software is complaint, then you should answer the following questions;
- Is your solution digital?
- Can all your financial information be put into your solution?
- Can your solution secure your financial data?
- Can your solution digitally hold up to 6 years of financial information?
- Does your system generate a VAT return and can it share it digitally with HMRC?
- Is your solution capable of voluntarily sharing VAT data with HMRC?
- Can your solution also digitally receive data from the HMRC?
If your answer to all of this is yes, then your system is MDT VAT compliant, but if your answer to any of this is no, then you should contact your software provider for an update that will make it MTD compliant. This is because your software must be used to submit returns to HRMC, using the HRMC’s Application Program Interfaces Platform.
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HOW MUCH IT COSTS
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It has been estimated by HRMC that setting up a MDT for VAT solution should only cost an average of £280. However, accounting bodies have estimated the cost to add up to as much as £3,000, whilst ongoing costs are predicted to range from £300−£600. This varies according to the businesses and it would be wise to have your financial team or an accounting firm take a look at the numbers to prepare an approximate estimate for your business.
The bright side is that once set up, MTD is expected to allow businesses to run more efficiently by taking away administrative finance workload.
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EXEMPTIONS
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The same exemptions that already apply to electronic VAT returns will also cover digital record keeping. These exemptions apply to businesses whose beliefs are not compatible with the use of electronic communication and practicing members of a religious society to whom an insolvency procedure applies. Also, to commissioners who are not satisfied that it is practicable to make returns using an electronic return system.
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VOLUNTARY PERIODIC UPDATES
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Using software that is compatible with the MTD VAT accounting software, will allow VAT information to be submitted periodically on a voluntary basis, therefore providing information more frequently than even obligated. This feature works best when providing an income tax update and can also be used to update changes in circumstance. This in no way affects the VAT return obligation and does not create an early payment request.
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ELIMINATES MISTAKES
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MTD VAT prevents avoidable mistakes that can affect tax returns. It is an accurate digital record and the functions built into the software ensure that the information reaches the HMRC directly thus avoiding transposition errors, in turn reducing tax costs. This therefore guarantees an accurate tax report.
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OTHER BENEFITS
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There are number of key benefits that apply to businesses that are MTD-compliant aside from its accuracy in tax reports. These benefits include:
- Reduced administrative tasks, allowing staff to focus more on business growth
- Allows for frequent checks of tax records
- Reduces your business’ reliance on paperwork and paper records thus improving your business’ economy and eco-friendliness
Penalty systems apply to non-compliance with MTD. These penalties are points based with points awarded for every payment missed. The penalties are then applied after a threshold has been reached in your submission schedule. However, this penalty structure is not applicable until 2020, giving businesses time to adjust to this new upgrade.
It is important to ensure that you are ready well in advance of the time when MTD is compulsory for all businesses. Ensuring that you have your software setup and you are well-versed in how to use it is therefore key to this preparedness. These seven important pieces of information about MTD should help give you a greater understanding about what you need to do to ensure your business is MTD compliant.
