Making Tax Digital: the details

Making Tax Digital (MTD) is a fundamental change to the administration of the UK tax system. It will affect how businesses and other organisations, agents and individuals maintain their accounting and tax records and how they transact and communicate with HMRC. 

Making Tax Digital – when do businesses need to act?

If you run a VAT-registered business with a taxable turnover over £85,000, you will need to do the following for VAT periods beginning on or after 1 April 2019:

1. Keep records in a digital format
2. Submit VAT returns using commercial software rather than the current government gateway account during your next tax period

Businesses with a taxable turnover below the VAT threshold can sign up for MTD for VAT voluntarily but is not compulsory.

For businesses that already use accounting software, not much will change, as most will already have the necessary functionality needed to submit MTD returns. They can still keep their accounting records as well as submit their VAT return in the same way.

The dates for when businesses need to comply with MTD depends on their VAT quarter return period. The breakdown is shown in the table below:

For certain businesses (referred to by HMRC as “complex businesses”) the MTD start date is deferred until 1 October 2019. This group includes:

• Trusts
• Not-for-profit organisations that are not companies (including some charities)
• VAT divisions (a body corporate with business units or divisions that are not limited companies)
• VAT groups (two or more companies or limited liability partnerships – known as ‘bodies corporate’ joined together)
• Public sector entities required to provide additional information alongside their VAT return (e.g. government departments and NHS Trusts)
• Local authorities
• Public corporations
• Traders based overseas
• Those required to make payments on account
• Annual accounting scheme users

Exemptions from Making Tax Digital

Some businesses might be able to claim exemption from MTD if any of the following apply:

• If the business is run by a religious society whose beliefs are not compatible with MTD compliance
• If it is not feasible for the business to use digital tools to keep records because of age, disability, remoteness of their location etc.
• If the business is facing insolvency

If your business falls into one of these categories you’ll need to contact the HMRC VAT Helpline to discuss alternative ways for submitting your VAT information.

Keeping digital records

Under MTD, VAT-registered businesses will have to keep their VAT records in a digital format. This means individual records of each transaction supporting the VAT return will need to be kept digitally (there are exceptions for some VAT schemes).

Digital formats include fully digital, MTD compliant, book-keeping software, Excel spreadsheets and ‘API enabled spreadsheets’ (see below). Physical invoices and receipts for expenses can either be scanned or kept in paper files.

VAT-registered businesses will need to keep the following digital records:

• Designatory Data (of the business itself) – business name, address of the principal place of business, VAT registration number and any VAT accounting schemes used
• Supplies Made – for each supply: the time of supply (tax point), value of the supply (net value excluding VAT) and the rate of VAT charged
• Supplies Received – for each supply received: record the time of supply (tax point), the value of the supply and the amount of input tax that will be reclaimed

MTD compliant software 

When submitting data to HMRC, businesses will need to use MTD compliant software.

To find out which platforms are currently MTD compliant, visit ICAEW’s Software for MTD page.

• Spreadsheets and Bridging Software

VAT records that are recorded in spreadsheets will now need to be digitally linked to bridging software for the VAT return to be transferred to HMRC. Bridging software is commercially available software that submits information to HMRC using a standardised template.

• Bookkeeping Software: API (Application Programming Interface) Enabled

Most bookkeeping software is API Enabled, so doesn’t require any additional software for information to be submitted to HMRC. This software can be used to record all necessary transactions, prepare the VAT return and submit to HMRC.

The best MTD software for your business should be chosen after evaluation and that could result in more than one software solution being adopted.

Penalties

The MTD for VAT notice introduces a ‘soft landing’ on penalties for the first 12 months, but only for digital links for any transfer or exchange of data between software programs, products or applications used as functional compatible software.

This will give you time to optimise your software solutions for the next 12 months, so you can find what works best for your business. However, the existing penalty system will continue to apply, including the default surcharge provisions.

If you have any problems with filing under the new system, you should continue to pay your VAT on the due dates.

Get advice

If you are in doubt about MTD and its requirements, then help is at hand from a number of sources.

Detailed requirements have been published by HMRC in VAT Notice 700/22: Making Tax Digital For VAT, as well as guidance on choosing compatible software.