Making Tax Digital for Small Businesses
*Please note the information in this article may be out of date
Making Tax Digital for VAT (MTDfV) comes into effect from 1st April 2019. With Chancellor Philip Hammond announcing in his 2019 Spring Budget that MTD for other taxes will not be mandated until at least 2021, all of our focus is now on the VAT implementation.
Mon, 25 Mar 2019
This Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.
In the Spring Budget of 2015, the biggest shake up of the UK tax system since the self assessment tax return was announced. Making Tax Digital. It’s been pushed back so many times now that many believed that it wouldn’t happen but Making Tax Digital for VAT (MTDfV) comes into effect from 1st April 2019. With Chancellor Philip Hammond announcing in his 2019 Spring Budget that MTD for other taxes will not be mandated until at least 2021, all of our focus is now on the VAT implementation.
What is Making Tax Digital for VAT?
HMRC are following examples from Australia, New Zealand and some of Scandinavia by requiring businesses to report online and report quarterly through compatible software.
From April 2012, the vast majority of VAT registered businesses have been required to file online. In its simplest form, HMRC are a bit like your high school maths teacher; they don’t just want to see your totals, they want to see your workings.
If your business keeps records digitally it is more than likely that this information is already captured. Only the way in which it is submitted to HMRC is changing. Just as spreadsheets were the natural progression from paper records, so online, cloud based solutions are the next step in the evolution of accounting. As they become more available and affordable it makes more and more sense for all businesses to make the switch.
Who is affected?
- Businesses turning over more than £85,000
The first and widest reaching implementation of Making Tax Digital for VAT affects VAT registered businesses with a turnover of more than £85,000.
The new rules will apply to these businesses from their first VAT period beginning on or after 1 April 2019, meaning the first digital returns will be due to be filed by 7 August 2019.
- Business turning over less than £85,000
Businesses who are VAT registered but have a turnover of less than £85,000 are not required to comply with the new rules but can voluntarily comply with MTD in anticipation of making the mandatory switch in April 2021. If your business registered for VAT voluntarily it is worth considering following the new rules.
Be careful: If you are trading above the VAT threshold on 1 April 2019 you will still be required to file digitally even if your turnover falls below the threshold until such times as you deregister. If you’re in, you’re in...until you’re out.
What’s Changing?
There is no need to memorise, or even really understand these changes but for completeness, here’s the details.
For both income and expenditure, you must record the following information in digitally compliant software:
- Time of supply (date) – the tax point
- Value of supply – the net value excluding VAT
- Rate of VAT charged
Digitally compliant software must be able to:
- Record and preserve digital records – to prepare the VAT return
- Provide information to HMRC using the API platform – to file the VAT return
- Receive information from HMRC using the API platform – to receive confirmation of filing
It should be noted that one piece of software does not have to perform all three functions, However, as packages are available from a few pounds per month that do, it makes sense to switch to a digital only system to save time and effort. For example, a spreadsheet is capable of recording and preserving digital records but must be linked with something else to perform the other two functions to complete compliant digital records. This is known as bridging software.
The biggest change with Making Tax Digital is the requirement for ‘Digital Links’ to be in place between all software used in the VAT recording and submission process. A ‘Digital Link’ is one where a transfer or exchange of data is made electronically between software without the need for manual intervention.
In practical terms, this means that the VAT return cannot be calculated in one place and manually entered into another, as with current filing via the HMRC online portal. VAT returns must now be populated from other information i.e, the digital records of income and expenditure.
While HMRC are clear that they do not consider ‘copy and paste’ to be a digital link, the requirement for digital links is subject to a ‘soft landing period’ of one year in order to allow businesses to make the necessary adjustments in order to comply. During this period ‘copy and paste’ will be considered an acceptable substitute. For the first period starting on or after 1 April 2020, digital links must be in place.
What does it all mean?
Although the regulations are lengthy and technical, MTD compliant software and a good accountant will ensure that the effect on you, as a business owner, is minimal.
Making Tax Digital for VAT, for businesses who already keep their records digitally, should be relatively straightforward. For those that keep their records manually, it is a somewhat larger concern. However it is important to note that HMRC are not requesting more or different information than already exists, they merely wish to cut down on the opportunity for human error through manual entry and transposition.
What do I need to do?
Firstly, If you are required to comply, or you think you might be required to comply, the first step is to contact your accountant. They’ll be able to tell you whether you have to change anything in the way in which you work. If you don’t already use an MTD ready system there are a whole host of options out there to suit your business. Like us at TaxKings, your own accountant may have a system that they prefer, can offer more support on and even include in your pricing package (we are Platinum Pro Quickbooks advisers but we support other options too when we feel it’s in the best interest of our client’s business).
From our point of view, the use of Cloud accounting software, including receipt management and automation, means accountants will be able to spend less time correcting or re-entering client data and more time advising business owners to manage and grow their business.
If you choose to go down the route of an all-in-one, fully MTD compliant software package, you’ll be able to automate a lot more of the bookkeeping process than the alternative option e.g. a spreadsheet with bridging software. For example, you can:
- Link your online bank feed - the transactions are automatically entered into the software for you.
- Set up “rules” which will automatically categorise recurring transactions. For example, if the bank description contains “O2” or “Vodafone”, you can tell the software to assign all future transactions with this description to “Telephone Costs” automatically. Rules take moments to set up, and as you set up more of these, you’ll save more time.
Summary
The move to Making Tax Digital for VAT may appear daunting but there is very much an upside. Keeping records digitally saves time, reduces costs and can help with managing your business. For one thing, business owners are less likely to lose claimable VAT receipts!
Sure, there will be an adjustment period while you get used to the new software, but the bottom line is that small business owners who do their own bookkeeping can (and will) save hours of time on data entry, leaving you with more time to focus on your business and your accountant with more time to advise you.
This Guide was written by Clare Doherty, Small Business Tax Expert at TaxKings Accountants. Clare now writes for Listentotaxman.com on matters relating to small business tax. She is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.