The Government has confirmed its intention to phase in its landmark Making Tax Digital (MTD) regime, which will see taxpayers moving to a fully digital tax system over the coming years.
This is the biggest change to the UK tax system since the introduction of Pay-as-you-Earn in 1944.
How will MTD affect me as an individual?
Digital tax accounts for individuals – Personal Tax Accounts (PTAs) – have already been created by HMRC. The accounts are pre-populated with information already held by HMRC. PTAs are set to be developed further and taxpayers will be able to report any additional sources of income through their digital account.
Individuals may wish to register for a personal tax account by visiting www.gov.uk/personal-tax-account.
Over time, many individuals with straightforward tax affairs may no longer need to complete a tax return.
When will MTD have an impact on my business?
The new MTD initiative was originally due to be implemented between 2018 and 2020.
However, delays – resulting firstly from a public consultation, followed by the snap General Election in June 2017 – led to the Government revising the timescale for the introduction of MTD.
From 1 April 2019, businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records for VAT purposes and provide this information to HMRC using MTD compatible software. The MTD requirement will remain even if turnover subsequently falls below the VAT threshold.
Keeping digital records and making quarterly updates will not be made mandatory for taxes other than VAT before April 2020.
Similarly, those businesses below the VAT threshold which have voluntarily registered for VAT can opt in to MTD.
HMRC piloted MTD for VAT in 2017, with wider live piloting beginning in spring 2018.
The Government plans to make the necessary VAT regulations available by no later than April 2018, allowing businesses and software developers’ time to develop the necessary software to meet the detailed requirements before they come into effect.
Are there any exemptions to MTD?
Exemptions will be available where HMRC is satisfied the business is run by a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications, or for which HMRC is satisfied that it is not reasonably practicable to make a return using an electronic return system for reasons of disability, age, remoteness of location or any other reason.
A business may also be exempt if it is subject to insolvency procedures.
There will be a right of appeal against the refusal of an exemption by HMRC.
What software will I need?
HMRC stipulates that businesses within the scope of MTD must use ‘functional compatible software’ to meet the new requirements.
The business can use more than one piece of software to keep its digital records, but those separate software programmes must be “digitally linked”.
This means a software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API). The software functionality must include:
- Keeping records in a digital form
- Preserving digital records in a digital form
- Creating a VAT return from the digital records held in functional compatible software and providing HMRC with this information digitally
- Providing HMRC with VAT data on a voluntary basis
- Receiving information from HMRC via the API platform that the business has complied.
What rules must I follow for the storage of digital records?
Businesses will be required to submit summary totals of their digital records to HMRC at least every three months.
The regulations will specify the information a business needs to keep and preserve digitally.
Businesses will also need to maintain digital records for the VAT account (the audit trail between primary accounting records and the VAT return). This should include details of the VAT payable portion and the VAT allowable portion.
The VAT account will also need to detail any adjustments made; such as correcting errors, claiming bad debt relief and annual adjustments for partial exemption and retail schemes.
Only the total for each type of adjustment will be required to be kept digitally and not details of the underlying calculations.
Businesses will need to preserve digital records for up to six years.
How will digital VAT returns differ from the existing regime?
Businesses within the scope of MTD for VAT will be required to submit their VAT returns using their compatible software.
Information will be pulled from the digital records to populate the VAT return. There will be a minimum of 9 boxes required to complete the return, although HMRC will permit businesses to include supplementary VAT information as part of a VAT return or voluntary update.
The Government has confirmed that the submission deadlines for Income Tax and VAT will not be aligned, meaning there will be no changes to the statutory VAT return or payment dates.
Businesses submitting monthly or non-standard period returns will be able to continue to do so.
The VAT annual accounting scheme will also be retained with the current conditions. Businesses making these types of returns will also be required to keep digital records and submit their VAT returns through functional compatible software.
Some businesses may choose to submit VAT information more frequently than their VAT return obligations require on a voluntary basis. Some businesses may choose to voluntarily provide further information by way of periodic updates and supplementary data.
Businesses will be able to submit VAT information more frequently than their VAT return obligations require on a voluntary basis as a ‘voluntary update’.
So what’s next?
Despite the revised timetable and information regarding some of the proposed requirements, software developers will need time to produce and test the necessary software to meet the new requirements under MTD.
Currently, 99 per cent of VAT returns are filed online, yet just 12 per cent of these returns are submitted using software.
Under MTD, VAT returns will need to be filed directly through functional compatible software rather than via the Government Gateway with supporting spreadsheets.
How can you help my business?
Whatever the size of your business, MTD will ultimately affect your firm. The team at Milsted Langdon will help you to prepare for the new system ahead of the start date of April 2019.
We will continue to monitor the progress of MTD so that we can advise you on the new requirements once these are finalised.
To discuss how the MTD reforms may affect you and your business, please contact us.