Everything you need to know…
What is Making Tax Digital?
Making Tax Digital (MTD) is one of the steps the government is taking to make it easier for individuals and businesses to get their tax right and manage taxes more efficiently.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. MTD is making fundamental changes to the way the tax system works so that it is:
- more effective
- more efficient
- easier for taxpayers to get their tax right
When does Making Tax Digital come into force?
MTD for VAT is effective from 1 April 2019 for the majority of VAT registered businesses. A few businesses with more complex VAT have a delayed effective date of 1 October 2019. The effective date is based on the VAT return period that commences on or after 1 April 2019.
If your quarterly VAT return ends on 31 March 2019, your first VAT return under MTD will be the VAT return for the period 1 April 2019 to 30 June 2019.
If your quarterly VAT return ends on 28 February 2019, the following VAT return period from 1 March 2019 to 31 May 2019 will not be required digitally as the period commenced prior to 1 April. Your first VAT return under MTD will be the VAT return for the period 1 June 2019 to 31 August 2019.
What does this mean for VAT?
VAT registered businesses with a taxable turnover above the VAT threshold (currently £85,000) are required to use the MTD service to:
- keep records digitally for VAT purposes; and
- use software to submit your VAT returns
You will need software that can submit VAT Returns and keep records of sales and purchases. If you’re already using software to keep records, you should check if it is compatible with MTD.
Does HMRC provide free software?
The simple answer is No. HMRC currently are not providing free software and external solutions are required.
Where can I get software that is compatible with Making Tax Digital?
HMRC has provided a list of software suppliers who are developing MTD compatible software. Alternatively, you could outsource your services to RoundPeg Finance and we provide software free of charge to customers who are signed up to our bookkeeping service. We are confident the cost and benefits of outsourcing your bookkeeping service to us will far outweigh the cost of licensing compatible software.
What is functional compatible software?
Functional compatible software is software that must be able to:
- record and preserve digital records
- send information and returns to HMRC from data held in those digital records by using the API platform
- receive information from HMRC via the API platform
HMRC expects that there will be software products available that will perform all of the functions listed above however some software programs will not be able to perform all of these functions by themselves. For example, a spreadsheet or other software product that is capable of recording and preserving digital records may not be able to perform the other 2 functions listed above.
The complete set of digital records to meet MTD requirements does not all have to be held in one place or in one program. Digital records can be kept in a range of compatible digital formats. Taken together, these form the digital records for the VAT registered entity.
Can I use a range of digital software or programs?
Data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital to form part of the digital records. Once data has been entered into software to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create the digital journey.
A ‘digital link’ is one where a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications. That is without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between 2 or more pieces of software. A digital link includes linked cells in spreadsheets, for example, if you have a formula in one sheet that mirrors the source value in another cell, then the cells are linked.
HMRC will also accept digital links, including, but not limited to:
- emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation)
- transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to an agent to import that data into their software
- XML, CSV import and export, and download and upload of files
- automated data transfer
- API transfer
HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs, to be a digital link.
I already maintain my records digitally, does this impact me?
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 MTD is that:
- the software which your business uses must be capable of keeping and maintaining the records specified in the regulations;
- preparing your VAT Returns using the information maintained in those digital records; and
- communicating with HMRC digitally via their Application Programming Interface (API) platform.
If your digital records are up to date, compatible software will be able to collate and prepare your return for you. The software would ask you to declare that it is correct and confirm that you want to submit it to HMRC. Once you have submitted your return you will receive confirmation through your software that it has been received.
Can I continue to use spreadsheets?
You can use spreadsheets for your record keeping and to calculate the VAT due, but you must use a bridging software to interface directly between the spreadsheet and HMRC.
Do I have to keep my invoices and receipts digitally?
No. Digital records need to be maintained but, currently, it does not require you to keep all your receipts and invoices in electronic form.
Which records do I need to keep digitally?
All VAT registered businesses must keep and preserve certain records and accounts. Under MTD, some of these records must be kept digitally within functional compatible software. Some software will record all your VAT records and accounts information. However, there are some records that by law must be kept and preserved in their original form either for VAT purposes or other tax purposes.
A business receives an invoice and inputs selected data contained in the invoice into functional compatible software. They must still keep the invoice in its original form as the data in the functional compatible software is not a copy of the invoice.
A business has functional compatible software that scans the invoices received and puts the information in its ledger. If the image is retained and contains all the detail required for VAT purposes then the business does not need to keep the original invoice unless it is required for another purpose.
Is there a grace period for keeping records digitally?
HMRC will allow a period of time, the “soft landing period”, for businesses to have in place digital links between all parts of their functional compatible software. For the first 12 months, businesses will not be required to have digital links between software programs.
During the soft landing period only, where a digital link has not been established between software programs, HMRC will accept the use of ‘cut and paste’ or ‘copy and paste’ as being a digital link for these VAT periods.
Will I get penalties if I am late or make a mistake?
HMRC recognise there is a learning curve as individuals and businesses get familiar with the new process and have confirmed there is a ‘light touch’ approach with regards to fines and penalties during the first year where it can be demonstrated businesses have taken steps to comply.
Which businesses are exempt from Making Tax Digital?
HMRC expect that most customers will be able to meet the legal obligations of MTD, but accept that it may not be possible for a small number of customers to do so.
You will not have to follow the rules for MTD if HMRC is satisfied that either:
- it’s not reasonably practicable for you to use digital tools to keep your business records or submit your VAT Returns because of age, disability, remoteness of location or for any other reason
- you or your business are subject to an insolvency procedure
- your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records
You’ll be exempt if it’s not practical for you to keep records digitally because:
- of your location – for example if you cannot get internet access at your home or business premises and it’s not reasonable for you to get internet access at another location
- of a disability – for example if you cannot use a computer, tablet or smartphone for the frequency amount of time it takes to keep digital records for your business
You might not be exempt if you:
- believe you should be exempt purely because of your age – HMRC will consider how your age and circumstances impact your ability to follow the rules for MTD
- are simply unfamiliar with the relevant software – HMRC will take into account how much you use or intend to use a computer, tablet smartphone or the internet for other purposes and whether it’s reasonable for you to learn how to use MTD
- consider yourself to be a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications – but you’re currently filing online and use a computer or smart device for business or personal use
HMRC will not give you an exemption purely on the basis that reasonable effort, time and cost may be involved in making the transition to MTD, for example choosing and buying any new hardware or software or learning to use them.
Which other taxes are covered by Making Tax Digital?
In March 2019, the government announced that they would continue to focus on supporting businesses to transition to MTD for VAT, and will therefore not be mandating MTD for any new taxes or businesses in 2020.
What should I do next?
If you already use software, check if it meets the compatibility requirements as discussed above. If it doesn’t, contact your software provider about any planned updates. If you are using an agent to complete your VAT returns, contact them immediately to check they are able to provide MTD service at no additional cost. If you are not digital ready, contact RoundPeg Finance and we can manage it all for you to make sure you are fully compliant.
How can RoundPeg Finance help you?
RoundPeg Finance are specialists in outsourced offshore accounting. We have access to over 200 ACA and ACCA accountants and bookkeepers experienced in UK accounts and taxes and skilled in a range of systems including Xero, QuickBooks, Sage and much more. The benefits of outsourcing your accounting to us means you not only benefit from very competitive rates but also specialised teams in all areas of accounting. All deliverables are subject to a three-level review including director review in the UK to maintain the highest levels of quality.
We have offices in London and Nottingham and can provide the following services:
- Year end financial statements and filing at Companies House
- Personal and corporate tax returns and filings with HMRC
- Contractor accounts
- Part time Finance Director services
- Consulting services
Please contact us for a free consultation or if you have any questions or require more information.
Why choose RoundPeg Finance?
For years, large multi-nationals have benefitted from offshoring their back office function overseas. We are making offshoring accessible to everyone, whether you’re a start up, small or medium sized business.