This post contains some important facts about Making Tax Digital. Businesses and landlords who join Making Tax Digital must keep their business records digitally. They must also send tax information to HMRC directly from those records.
Firstly, from 1 April 2019, all VAT-registered businesses with a taxable turnover above the VAT threshold are required to comply with MTD. As a result, these businesses will have to keep records digitally. They will also have to send VAT returns using MTD-compatible software. The only exception to this is for a small minority of businesses. HMRC are deferring MTD for them. This is to ensure there is sufficient time for testing the service as a pilot. They will then be required to join from 1 October 2019.
MTD will still apply if the VAT taxable turnover falls below the VAT threshold, unless the business deregisters from VAT. Or if it meets one of the other exception criteria, such as insolvency.
The deadlines for sending VAT returns and making payments will not be changing.
Furthermore, businesses will need to use software to keep their business records digitally. This may include dedicated bookkeeping software. It can also include a combination of software packages or spreadsheets.
Also from April 2019, software that prepares a VAT return to send to HMRC must be MTD-compatible for those required to use MTD from this date. This means that it will be able to link with HMRC systems to send VAT returns to HMRC.
Finally, from April 2020, data must be exchanged digitally between all software used by a business for VAT. The information contained with the MTD VAT return will be generated by pulling information from the digital records. This information will be the 9 boxes required for the VAT return.
With spreadsheets, this means the software must take the relevant information from the spreadsheet electronically and sending it to HMRC.
Businesses joining MTD for Income Tax will need to send quarterly summaries of their income and expenses to HMRC. MTD-compatible software will need to be used for this. The Business will then receive an estimated tax calculation. This will be based on the information provided to help them budget for their tax. MTD-compatible software means it can link directly to HMRC systems to send updates to HMRC.
The deadline for making Income Tax payments is not changing.
HMRC is creating the ability for businesses to send information about all types of income, using software. This will include employment income, bank and building society interest, dividends, gift aid etc. Software developers will continue to build this capability into their products. It is hoped this will result in a better experience for customers as MTD continues to develop.
HMRC is not offering its own software products. But it will provide the Application Programming Interfaces (APIs) that commercial software developers will use to develop applications. As a result, businesses will be able to keep their records digitally and link with HMRC systems. An API is software that that links 2 or more software programmes together. This allows them to exchange data.
The benefit of this is that software developers can offer more flexible options. Functionality and technical support will cater to specific businesses and sectors. For example agriculture, construction, landlords and freelancers. Not just to the requirements of the general business population.
HMRC is working closely with software developers to enable them to offer new products. They will continue to publish APIs with more capabilities. You can read more about the HMRC API strategy.
The advantages of digital record keeping
Businesses can benefit from using software to keep digital records. Whatever their turnover. Software can help a business to be more effective. It can also reduce avoidable errors in business records. These can occur when manual calculations are performed.
By keeping up to date digital records in real time, businesses are less likely to lose receipts. Digital records can also reduce the risk of errors due to lost or incorrectly recorded invoices. Eventually, software will contain prompts which will remove common errors.
Going digital makes managing business finances more straightforward. Millions are already banking, paying bills and interacting online. The next step is going digital with business records and taxes. Businesses will have more control and better capability to forward plan with their finances.
By making it easier to get things right, digital record keeping will reduce the risk of HMRC interventions. These can be costly and unwelcome. It can also help businesses to manage their cash flow more effectively.
Keeping business records digitally also makes it easier to share them with your accountant. This saves you time and money.