Making Tax Digital FAQs
- What is Making Tax Digital?
- What will Making Tax Digital mean for individuals?
- What will Making Tax Digital mean for businesses?
- What will Making Tax Digital mean for charities?
- Will there be any exclusions from Making Tax Digital?
- When is Making Tax Digital starting?
- What does it mean to “maintain digital records”?
- How will information need to be submitted to HMRC?
- Where can I get software that will enable me to meet my requirements?
- What information will need to be submitted to HMRC?
- What will happen if I do not comply with my requirements?
- What do we know about how Making Tax Digital will affect Corporation Tax obligations?
- How will Making Tax Digital affect unincorporated businesses’ income tax obligations?
- What do I need to do now?
- Can I use more than one application to submit VAT returns?
- How can Kingston Smith help?
Making Tax Digital is the Government’s plan to modernise and digitalise the UK tax system.
The Government’s ultimate intention is that:
- HMRC will collect and process information affecting tax liabilities as close to real time as possible;
- All taxpayers will have digital tax accounts, where they will be able to see all the information that HMRC holds, and keep abreast of their tax position throughout the year.
It will take time, but ultimately Making Tax Digital will lead to the biggest revolution in the administration of the UK tax system for decades.
Individuals will have an online Personal Tax Account, and HMRC will use this to bring together all the information they have in respect of each individual’s tax affairs.
HMRC receives information from a variety of sources, including details of employment income from employers, details of interest from banks, and more. They plan to join up their systems so that this information will automatically update individuals’ Personal Tax Accounts.
The Government does not want individuals to have to provide HMRC with information it already has, and ultimately they want to remove most parts of the annual tax return process.
The Government wants to ensure that businesses maintain digital records, and that they provide information directly to HMRC from these digital records on a regular basis.
Starting from 1 April 2019, VAT registered businesses with turnover above the VAT threshold of £85,000 will need to maintain digital VAT records, and use these records to meet their VAT reporting requirements.
It is planned that the regime will be extended to encompass income tax (for unincorporated businesses) and corporation tax (for companies), although this will not be until April 2020 at the earliest.
Charities and subsidiaries of charities will be subject to Making Tax Digital for VAT in exactly the same way as other VAT registered entities. This means that if they are VAT registered, with taxable turnover above the VAT threshold, they will need to maintain digital VAT records, and use these records to meet their VAT reporting requirements.
Those who are “digitally excluded” will not have obligations under Making Tax Digital. This will include those whose religious beliefs are incompatible with the requirements of Making Tax Digital, and those for whom the requirements are impractical due to age, disability, location etc.
From 1 April 2019, Making Tax Digital for VAT purposes will only be mandatory for businesses with a taxable turnover above the VAT threshold, which is currently £85,000.
When Making Tax Digital is extended to income tax and corporation tax it is expected that the smallest businesses will be exempt from the requirements, but this has not yet been confirmed.
Making Tax Digital will be introduced for VAT purposes – meaning that businesses will need to maintain digital records for VAT purposes, and use these records to meet their VAT reporting requirements – from 1 April 2019.
Specifically, businesses already registered for VAT will be within the regime from the first VAT return period commencing on or after 1 April 2019.
The intention is to extend the requirements to cover income tax (for unincorporated businesses) and corporation tax (for companies), although the Government has said that this will not happen until “at least 2020”.
Under Making Tax Digital, businesses will need to maintain certain records in either software or a spreadsheet.
For VAT purposes, there is a specific list of information that will need to be maintained digitally. This includes, amongst other things, the value of each supply made and received, the rate of VAT charged on each supply made, and the VAT that will be re-claimed on each supply received (with some relaxations for retailers and a few others).
It will not be necessary to store invoices digitally.
Some businesses or groups may find it necessary to use a number of pieces of software in order to prepare one VAT return. Where this is the case, records wilI need to be transferred between software programs through digital links (i.e. they must not be copied and pasted, or re-entered manually).
Calculations for things such as partial exemption adjustments, and fuel scale charges, will not need to be captured digitally; these can be prepared separately and manually input into the digital records.
Information will need to be submitted to HMRC using APIs.
The most straightforward approach will be for businesses to maintain their records in API-enabled software, and then to submit information directly from that software.
Other alternatives include:
- maintaining records in an API-enabled spreadsheet, and submitting information directly from the spreadsheet
- maintaining records in a non-API enabled spreadsheet or software program, and then using ‘bridging software’ to submit the information to HMRC
- maintaining records in a number of spreadsheets/software programs, and then using digital links to bring these together, such that the information can be submitting to HMRC using APIs
Currently software companies are developing and testing products that will enable businesses to meeting the requirements for Making Tax Digital for VAT. HMRC are maintaining a list of software suppliers that have tested products, and demonstrated a prototype of compliant software. Organisations are required to use HMRC approved softwares, or a bridging solutions which enables VAT returns to be submitted through a digital link. This list can be found here.
This list contains a number of suppliers with whom we work closely, including Quickbooks, Xero, and Sage.
It is expected that software products will start to be available later in 2018.
For VAT purposes, only the information that is currently shown in the nine boxes of a VAT return will need to be submitted?
When Making Tax Digital is extended to include income tax and corporation tax, it is expected that a summary of income and expenditure will need to be provided each quarter, with a final return being required (as is currently the case) after the end of the accounting period.
Organisations that do not comply with their requirements will be liable for penalties, and the government is currently updating the penalty regime to account for the changes that Making Tax Digital will bring. However, if there is a breakdown on the links there will be no fines on submission.
There is expected to be a “soft-landing” on penalties between April 2019 – 2020, but details of exactly what this means are not available yet.
Currently we know very little about the details behind this. The Government is expected to publish a consultation document on this area later in 2018.
Eventually, unincorporated businesses will need to submit a quarterly summary of their income and expenditure directly to HMRC using APIs. The government has said that this will not happen until “at least 2020”.
A number of software companies have already released software that will enable these obligations to be met, and a pilot project is currently on-going.
If your business is going to be within the regime from 2019, you will need to make sure, well in advance, that your accounting systems have the capability they need to allow you to fulfil your obligations.
For some businesses, this will mean checking that your current software will be capable of sending the relevant information to HMRC when the time comes. Other businesses might need to change their digital accounting system, or even start using software for the first time.
Even if you are not going to be within Making Tax Digital from 2019, you may still want to put in place a digital accounting system if you do not already have one. Doing so could give you:
- a better understanding of how your business is performing throughout the year;
- the opportunity to get more proactive advice and support from your business advisers.
You can use two applications which must exchange data digitally.
Our team of specialists are all accredited in using the leading MID-compliant software. We will review your systems, streamline your accounting function and help you transfer to the digital solution that is suitable to your business needs while also meeting HMRC’s requirements.
For further information or to discuss what MTD means for your organisation and how we can support you, please contact your client partner or our MTD team. Alternatively please call us on 020 7566 4000 or email firstname.lastname@example.org.