Anyone’s who’s been to a business event recently will know small business accountants are all talking about one thing and one thing only: Making Tax Digital. It’s coming fast, and it’s going to impact every business in the UK.
Making Tax Digital, or MTD, is a UK government initiative aiming to digitise all tax reporting and account maintenance for companies doing business in this country. Essentially, MTD requires businesses and organisations to maintain digital accounting records. It’s a requirement not just for companies that trade goods or services, but will also impact charities, public bodies, trusts, and other entities such as those with income from property. Paper records and those that are not digitally linked with HMRC, including spreadsheets, will no longer meet the requirements of UK tax legislation.
To maintain those digital accounting records, businesses will need to use a “functional compatible software product” to submit their returns to the authorities. This software will use HMRC’s API platform, and current online tax return services will be withdrawn for anyone considered in scope of MTD. HMRC has published a list of software that it has vetted as compliant with Making Tax Digital, or you can speak with small business accountants for recommendations. Compare accountants and find the right one for your business, here.
According to VAT Notice 700/22, published 13 July 2018: “It is increasingly common for business records and accounts to be kept digitally, in a software program on a computer or tablet, or in a smartphone application, or maintained through such a device and stored using a cloud-based application. The difference under Making Tax Digital is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT Returns using the information maintained in those digital records and communicating with HMRC digitally via our Application Programming Interface (API) platform.”
The first roll-out concerns VAT reporting, and it will be mandatory for most businesses from 1 April 2019.
Who does it impact?
MTD for VAT impacts any business operating over the VAT threshold, currently £85,000. It requires VAT-registered businesses with taxable turnover above the threshold to keep records in digital form and file their VAT returns using software, not paper-based or siloed digital methods (including spreadsheets).
There is a six-month deferral for a small percentage of businesses, including trusts, not for profit organisations that are not companies (including some charities), local authorities, annual accounting scheme users, and traders based overseas. If you’re unsure if your business is in the deferral camp, check with small business accountants to be safe. Remember, though, the deferral only lasts six months, and you’ll still need to comply from October 2019.
What are the timelines?
Making Tax Digital will be mandatory for most businesses from 1 April 2019, though original roll-out plans were impacted by the complexity of the system, customer concerns and Brexit complications, according to the Financial Times, which says the 1 April deadline will still apply to 96.5% of businesses in the UK.
The latest timeline from HMRC is as follows:
October 2018: A pilot opened for sole traders and companies
Late 2018: Private testing beginning or partnerships and customers that trade with the EU
Late 2018/early 2019: Pilot open for sole traders and companies who are not up to date with their VAT, users of the VAT flat rate scheme, and businesses that are newly-registered for VAT
Early 2019: Pilot open to partnerships and customers that trade with the EU
1 April 2019, MTD mandated for all customers - except those in the deferment scheme
Spring 2019: Pilot opens for deferred customers
October 2019: MTD mandated for deferred customers
This timeline is updated on the HMRC website as and when anything changes, but small business accountants will also be able to keep you informed.
How does it affect VAT filing?
No changes are being made to the underlying VAT rules, the amount of information required to be provided to HMRC, nor the current filing and payment deadlines for VAT.
The software small business accountants choose to use must be able to keep and preserve records in a digital form; create a VAT return from those digital records, and provide and receive information from HMRC via an API. Again, small business accountants are best placed to provide advice here; if yours cannot, compare accountants and find a new business partner who can help.
What do small businesses need to do?
Many small businesses are already using cloud accounting software such as Sage, Xero, QuickBooks or Free Agent; all of these are in HMRC’s list of compatible functional software and will be ready to submit data as necessary.
However, MTD is a complicated beast and this VAT roll-out is just the first of many changes coming our way. If you’re not already working with small business accountants to act as your agent to HMRC, it may be time to consider bringing one in. Compare accountants and get free quotes from a range of small business accountants through the PROfiltr platform, designed to match small businesses with accountants across the country. Discover how it works and compare accountants, here.