Compliance
Essentials Making Tax Digital from April 1st 2019.
CEMTD01/01/2019
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Making Tax Digital from the 1st April 2019 Making Tax Digital is a key part of the Government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. The primary aim of Making Tax Digital is to make the administration of tax effective and easier for taxpayers through the fully digitalised tax system by 2020, which in turn will reduce the overheads for HMRC for managing tax. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works – transforming tax administration. The changes will apply to a wide range of tax payers including most business, self-employed professionals and landlords. In summary, how will businesses by affected?: • A business with a turnover above the VAT threshold – currently £85,000, from April 2019 will need to process VAT returns digitally. • A business will no longer be able to add their VAT figures to the HMRC website, they must move to electronic uploads from their accounting system to HMRCs system. • Businesses will not be asked to keep digital records or update HMRC quarterly for other taxes until at least April 2020. HMRC has not released specific details for this to happen. • There is no soft approach to Making Tax Digital the live date is 1st April 2019 and businesses must comply from that date. It is a mandatory requirement and there are no exceptions. • The deadlines for sending VAT returns and making payments are not changing, including for monthly, quarterly and annual VAT return schemes. This is a massive change for a lot of business and preparation needs to be started as soon as possible. Making Tax Digital for VAT is enforced by law and is therefore a mandatory requirement and you cannot opt out.
Helping businesses, self-employed people and landlords get it right first time The majority of customers want to get their tax right, but the latest tax gap figures show that too many find this hard, with avoidable mistakes costing the Exchequer over £9 billion a year. The improved accuracy that digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records, avoiding transposition errors, should reduce the amount of tax lost to these avoidable errors.
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The primary legislation for Making Tax Digital relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017, providing certainty about the broad framework in which Making Tax Digital will operate, with secondary legislation for VAT laid in February 2018, coming into force from April 2019. A VAT Notice 700/22 has been published and updated on the 18th January 2019 which explains the rules for Making Tax Digital for VAT and about the digital information that must be kept.
Will your business be impacted by Making Tax Digital for VAT If your business is VAT registered with a turnover above the VAT threshold then you will be required to use the new guide lines of Making Tax Digital for VAT. If your business is not VAT registered but you are approaching the threshold we would advise that the business should understand the requirement of Making Tax Digital for VAT and look to speak with your accountants to help your business prepare in advance. Making Tax Digital is not just filing your VAT return digitally, your business will be required to save information of your VAT returns digitally, now being referred to as digital record keeping. If your business is using more than one piece of software to hold VAT information and the returns, they will need to be digitally linked. This is an important part of the process of Making Tax Digital and so again businesses need to start to prepare well in advance for this and ensure their software is HMRC ready.
Is your software ready for Making Tax Digital? If your business is already using an accounting software the process may be easy and straightforward and could only be a matter of taking advantage of further features of your accounting package. However, in some cases older software may not be compatible with HMRC and so you will need to check your accounting software is right for the changes. All businesses need to have software that is a Making Tax Digital ready version. If your business is using a manual process of spreadsheets to compile VAT returns then you do need to look at ways to replace this process. Your business will need to look at a software package that will record VAT details and filling of VAT returns, you will need to make sure that this integrates with your software of choice before April 2019. Postal and online submissions will no longer be accepted by HMRC as of April 2019. If your business chooses to join the HMRC pilot and begin submitting before April 2019 this will give your business more time to prepare before it become a compulsory process. If you are VAT registered but have a taxable turnover below the threshold, you can continue to use the current online VAT return, although encouraged by HMRC to opt in to Making tax Digital, you have no obligation to do so.
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Businesses exempt from Making Tax Digital HMRC expect that the vast majority of customers will be able meet their legal obligations under Making Tax Digital (MTD) rules, but accept that it may not be possible for a small proportion of customers to do so. You will not have to follow the Making Tax Digital rules where HMRC is satisfied that: • It is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason; • You are subject to an insolvency procedure; or • Your business is run entirely by practicing members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records. The majority of customers meeting these circumstances will already be exempt from filing their VAT returns online. If an exemption from online filing for VAT already applies to you, it will continue to apply under MTD and you are under no obligation to sign up to MTD for VAT. In these circumstances you do not need to reapply for exemption. HMRC recognise that some customers who are not already exempt from online filing for VAT may still qualify for an exemption from MTD. HMRC will consider exempting customers from MTD obligations only where it is clear that they cannot meet them. If you think you meet the criteria and have a genuine claim for exemption you should contact the VAT Helpline on 0300 200 3700. Or in writing to HM Revenue and Customs – VAT Written Enquiries Team, Portcullis House, 21 India Street, Glasgow, G2 4PZ, United Kingdom
Businesses deferred until October 2019. For a small minority of VAT-registered businesses with more complex requirements, HMRC have deferred mandation by 6 months, to ensure sufficient time for testing the service with them in the pilot before they are mandated to join. These businesses will be mandated to keep digital VAT records and send returns using MTDcompatible software from 1 October 2019. They have estimated that it will apply to around 3.5% of businesses. The official list of businesses that are deferred until October 2019 are: • Businesses required to make payments on account • Annual accounting scheme users. • Trusts. • Not for profit organisations that are not set up as a company. • VAT divisions. • VAT groups. • Public sector entities that are required to provide additional information on their VAT return. • Local authorities • Public corporations. • Traders based overseas.
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Making Tax Digital for VAT time line Date October 2018
Activity Pilot launched for sole traders and companies (except those which are part of a VAT group or VAT Division) provided they are up to date with their VAT. Those who trade with the EU, are based overseas, submit annually, make payments on account, use the VAT Flat Rate Scheme, and those newly registered for VAT that have not previously submitted a VAT return, are unable to join at this point.
Late 2018
Private testing began with partnerships and those companies that trade with the EU.
Late 2018/ early 2019
Open to other sole traders and companies who are not up to date with their VAT, users of the Flat Rate Scheme and businesses newly registered for VAT that have not previously submitted a VAT return.
Early 2019
Open to partnerships and those customers that trade with the EU.
Spring 2019
Pilot open for Making Tax Digital customers that have been deferred.
April 2019
Making Tax Digital mandated for all customers (except those that have been deferred).
October 2019
Making Tax Digital mandated for companies that have been deferred.
April 2020
Corporation and Income Tax commences (at earliest). Date and details to be confirmed by HMRC.
Currently over half of businesses with turnover above the VAT threshold use software for tax purposes, but no taxes other than VAT will be mandated before 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record-keeping to become more widespread amongst businesses.
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What records does my business need to keep for Making Tax Digital for VAT? These are no additional records needed for VAT, but now they need to be recorded digitally. The following records must be kept and filed digitally, businesses must then use HMRC compatible software to send their VAT return in order to be Making Tax Digital compliant. Designator data: • Business name. • Address of your main place of business. • VAT registration number. • A record of any VAT accounting schemes used. For each supply your business makes: • The time of supply. • The value of the supply. • The Rate of the VAT charged. For each supply you receive: • The time of supply. • The value of the supply including any VAT that is no claimable. • The amount of input tax that you will claim. Your VAT account, including: • The output tax due on sales. • The output tax due on acquisitions from other EU member states. • The tax payable on behalf of your supplier under a reverse charge procedure. • The tax that needs to be paid following a correction or error adjustment. The input tax claimable from business purchases. • The input tax allowable on acquisitions from other EU member states. • The tax reclaimable following a correction or error adjustment. • Any other necessary adjustment required by VAT rules.
Is Income Tax part of Making Tax Digital? Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot, to test and develop the Making Tax Digital service for Income Tax. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self-Assessment tax return. It has been proposed that from April 2020, Income Tax and Corporation Tax will become part of the Making Tax Digital. Further details will be announced by HMRC.
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Cost implications to a business For a business that has been using paper you will now be required to use digital software. There are a number of providers that will offer this on a subscription basis with packages tailored to the size of the business. HMRC are not offering their own software products, but will provide Application Programming Interfaces (API’s) that commercial software developers can use to develop a range of applications that will let businesses kept records digitally and integrate with HMRC system. An API is software that will link 2 or more software programmes together allowing the exchange of data. “On average an SME can save 27.6 days a year using digital accounting software in comparison to using a manual method of accounting”. Businesses must also ensure that staff are trained to deal with the new rules, this may incur costs.
Bridging Software For businesses still using paper to manage accounting processes, bridging software is an option that enables the business, book keepers and other organisations to link your Microsoft Excel spreadsheets to HMRC. The software will interact with various HMRC’s MTD VAT APi’s making the submission of VAT returns achievable and simple to complete via the facility to extract VAT 9 Box values. There are providers that can help with this process, the spreadsheet will need to contain all the necessary transactional data for the VAT period and there is a single sheet calculation where the VAT 9 box values for a VAT period have been summarised. This will be enough for the software to extract the information required by HMRC and business can then use a mapping feature to integrate and extract VAT values. The transfer of the spreadsheet data into the bridging software must be carried out digitally as HMRC are not enabling the data transferring to be completed manually and will not accept. You will not be able to manually type the values within the VAT boxes of the bridging software. Bridging software is provided on an annual licence basis and is granted for the use of a specific version of the software and a new licence should be purchased for each version of software your business owns. There software is for one user on one computer and additional licenses must be purchased for other users. Network versions are available. In cases of version upgrades, annual licences of the new version will then supersede the earlier software versions.
Benefits of Bridging Software Security • User name and password to access the software • Security access rights to functions • Back and restore facilities
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Benefits • Businesses can continue to use an excel spreadsheet, with minimal modifications – this will be for as long as HMRC permits this process for digital record keeping • The software is compliance with Making Tax Digital legislation • Easy to use, linking VAT transactions to Excel spreadsheet and using the drag and drop mapping of VAT 9 box fields • Integration with HMRC APi • On screen preview of VAT return prior to submission • Manage multiple VAT periods Who do I need to talk to about Bridging Software? You will be able to speak with your own accountant with regards to bridging software, some accounts will be offering a discount as they can also be registered resellers for the software. Note: We will always recommend looking around and doing your own research to make sure this is the best option for you and your business. Look to see if any free demonstrations are available of the software before committing to a license for 1 year. Also take a look at: www.taxoptimiser.co.uk/Features/MTDVAT - TaxOptimiser have a free bridging tool for Making Tax Digital VAT for business and accountants www.absoluteexcelvatfiler.co.uk/pages/absolute-excel-vat-filer - Absolute Excel VAT have created the Excel VAT filer www.taxcalc.com/vat - simple and effective way to file VAT HMRC Software suggestions: www.quickbooks.intuit.com/uk/making-tax-digital/ www.xero.com/uk/making-tax-digital/ www.sage.com/en-gb/making-tax-digital/ A full Government suggested list can be found at: www.gov.uk/guidance/software-for-sending-income-tax-updates#VATs
Making Tax Digital Check List 1. Determine whether your business is impacted by the change Are you currently under the £85,000 VAT threshold? Will you be eligible?
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What you need to do: • Get your business details in order before beginning • Consider your projected turnover for the next 12 months/year end date
2. Review your Plan If your business is already using and accounting software check that your provider/package will be updated to the latest Making Tax Digital enabled version and when. You may also want to establish the most practical time for your business to make the software switch – after your year end for example.
What you need to do: The best way to work to make a meaningful change is to examine the way you currently operate in business • Do you use software? Is it Making Tax Digital ready? • Do you work manually, through excel or do you have an alternative in place? • Do you use an accountant – what are their thoughts on this?
3. Start reviewing your VAT Process Work with your business partners and accountants and don’t hesitate to get support from your software provider if you will be downloading accountancy software for the first time.
What you need to do: Outline the processes you may need to change: Are you submitting through HMRC’s online gateway? Are you using Excel or paper? Will your current methods/software allow you to submit through the gateway once Making Tax Digital comes into effect? • Do you use software? Is it Making Tax Digital ready? • Do you work manually, through excel or do you have an alternative in place? • Do you use an accountant – what are their thoughts on this? Do you have any adjustments to make before April?
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4. Adopt now, rather than later. The faster you have your business getting started, the more likely you are to fulfil the new Making Tax Digital obligations and relation requirements. It will also become a seamless and less rushed approach to April 2019 deadline date. Give yourself and your business time to adapt to the new processes and get the support from your accounting team to make the impact to your business as minimal as possible.
Disclaimer. The Forum of Private Business has taken every possible care to ensure that the information contained in this guide is accurate at the time of going to press, and the publishers cannot accept any liability for errors or omissions, however caused. The information given by this Making Tax Digital Guide cannot be taken as an authoritative interpretation of the law. Sources of information from Gov.uk, Sage.com and Cobwebinfo.com
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CEMTD01/01/2019
