Making Tax Digital

Making Tax Digital (MTD) is the most fundamental change to the tax system for at least 20 years and the essential elements for businesses and landlords are:

Under the MTD rules paper accounting records cease to meet requirements and are no longer deemed as sufficient: In order to comply it will be necessary for almost all businesses (self-employed, partnerships, LLPs and limited companies) and larger landlords to use software or spreadsheets to keep their accounting records.

Quarterly reporting: When ‘full MTD' is implemented there will be a requirement to submit updates to HMRC each quarter directly from bookkeeping software or spreadsheets within one month of the end of each quarter. These updates will include details of business (or rental) income and the related business expenses by cost type. Potentially the quarterly data submissions under full MTD could be fairly unrefined and so once we have prepared your normal annual accounts we will be required to overwrite the existing quarterly details so that the overall figures match to the annual accounts.

Naturally, we will try to help you through the changes that MTD will bring.  However, the changes will be so fundamental that, ultimately, it will be necessary for you to become involved with the quarterly reporting to HMRC. If you currently operate computerised bookkeeping then the procedural changes should be relatively minor – slightly more so if your records are spreadsheet based – although it will be a complete sea change for those currently keeping fully manual bookkeeping records.

When does MTD become relevant?

VAT: It started on 1st April 2019 (applies from the first whole VAT quarter starting on or after 1st April 2019) and so if your business is registered for VAT and your turnover is above the VAT threshold, which is currently £85000 per annum, then you are effectively already in MTD and so you are required to keep digital accounting records and submit your VAT Returns using MTD compliant software. As a consequence HMRC's online VAT Return portal will be closed to you once your last pre-MTD VAT Return has been submitted.

It is important to note that businesses which are VAT registered but currently trading with an annual turnover under the VAT threshold will also be required to adopt MTD in respect of VAT in due course although this is unlikely to be before 1st April 2021.

Income Tax (self-employed, partnerships, LLPs and larger landlords who complete self assessment tax returns): Whilst the Government intends full MTD to become mandatory for income tax reporting it has indicated that this will not be implemented before April 2021.

Corporation Tax (limited companies): Currently as per the ‘Income Tax’ timings above.

Are there any exemptions?

There are to be exemptions for those who are not able to engage digitally for religious reasons or due to factors such as age, disability or location (e.g. no availability of broadband); these match the current exemptions for VAT online filing.

As mentioned above, VAT registered businesses with a turnover of less than the VAT threshold (currently £85000 per annum), such as lower turnover businesses which voluntarily registered for VAT or where income has declined to a level below the threshold, will initially be exempt from VAT MTD reporting although the Government intends to remove this exemption in due course. Until it does so those businesses will be able to continue to use the normal HMRC online portal in order to submit their VAT Returns.

When full MTD becomes mandatory there is likely to be an exemption for businesses and/or landlords with a small turnover; the level of this exemption is yet to be confirmed and could be subject to change although HMRC has suggested that a business or landlord with an annual turnover of £10000 or less could well be exempted.

What do I need to do now if my business is currently VAT registered (and has a turnover above the VAT registration threshold)?

Once your last VAT Return is submitted which is covered by the pre-MTD rules you must 'register' with HMRC to subsequently submit VAT Returns under MTD.  The link to do so is:

If you currently use accounting software then it may need to be updated if this has not already happened, although if you are buying software for the first time then it would be prudent to discuss this with us.

If you use spreadsheets and wish to continue with them then you will almost certainly need to acquire software which interfaces with HMRC's system and allows VAT Return submissions to be made directly from the spreadsheets – known as ‘bridging software’. When submitting data there can effectively be no human intervention.

If you have been using maintain paper records then your bookkeeping must change immediately as you must adopt a digitally based bookkeeping system.

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