Full steam ahead for Making Tax Digital
After some delay, HMRC has confirmed that Making Tax Digital (MTD) will officially launch on the 1 April 2019. The roll out will start with VAT and it has a mandate to include other taxes from 2020.
Although the initial change is not as dramatic as first expected, the new reporting guidelines are still a big ask for many smaller businesses. With that in mind, it is important to prepare now to ensure you are ready for April 2019.
Who will it affect
The initial introduction will affect companies who currently file a compulsory VAT return – those with a taxable turnover above the current VAT registration threshold of £85,000. This will include landlords, sole traders, partnerships and limited companies.
A yearlong pilot for VAT will run from April 2018, which will help to familiarise businesses with the new guidelines. A pilot for income tax has also been announced starting first for sole traders, followed by unincorporated buy-to-let landlords, which could come start as early as May 2018.
Those who voluntarily submit a VAT return can opt to submit their VAT return information digitally, however, are not legally required to.
Existing exemptions for the ‘digitally excluded’ will still apply. The ‘digitally excluded’ are usually exempt for religious, age, disability or remote locality reasons. It is expected that the registered number of digitally excluded will increase with the introduction of Making Tax Digital.
When will I be affected?
Those with a VAT return period commencing on or after the 1 April 2019 will be required to file digitally from the first staging date 01/04/19. Those with VAT return period starting before then will be required to submit digital records at the start of the following quarter (1 July 2019).
Click here to view our Making Tax Digital timeline.
The process will need to be repeated on a quarterly basis, so those affected must take care to keep their bookkeeping up to date.
Bookkeeping processes for MTD
For Making Tax Digital, all transaction records must be recorded in a compatible software that can be used to transmit VAT figures to HMRC.
Using a cloud accounting software package will help you to maintain your bookkeeping records easily and store them in a digital format. If you are not already using cloud accounting software, it is advisable to start moving bookkeeping records over into a digital format now, so you are ready for April 2019.
Spreadsheets may still be used as a digital record, but a summary of the information contained in the spreadsheet must be submitted to HMRC via a ‘functional, compatible software’, such as a cloud accounting software, which can connect with HMRC’s systems.
HMRC has also announced that bridging software will be developed which will create a digital link between spreadsheets and HMRC’s systems to enable taxpayers to submit information electronically. However, details of how this will work, and the cost of such software is still unknown.
Currently, adjustments such as partial exemptions and fuel scale charges for VAT returns are commonly calculated within spreadsheets. HMRC has confirmed that adjustment figures can be manually typed into software, however it recommends that a digital link is in place between the spreadsheet calculation and the software to minimise error.
What to do next
Ultimately, Making Tax Digital is the Government’s plan to make it easier for businesses to stay on top of their day-to-day accounts and reduce their reliance on the annual tax return to settle their tax position.
The key to being ready for its introduction is preparation. What may seem a daunting process could offer the opportunity to streamline your tax and accounting.
Although not a requirement, HMRC are encouraging the use of online cloud accounting software. For this, we recommend Xero as it is easy to use, the entry level costs are reasonable and it can be scaled-up to suit changing business needs. We hold free, ‘introduction to Xero’ workshops where those new to online accounting software can find out more about how it can help them run their business.