Making tax digital. Are you ready for the change?

Lucinda Davenport of Crowthers Chartered Accountants explains how businesses owners and individuals can make sure they are on top of the recent digital revolution of tax.

In July 2017 the government announced a new initiative called Making Tax Digital (MTD), with the aim of modernising and creating a more efficient tax system for businesses, the self-employed, and landlords in the UK.

See also: Making tax digital Q and A

The VAT element of Making Tax Digital came into force from April 2019 (with MTD for income tax expected to launch in 2020), so it is key for self-employed individuals, landlords and business owners, with gross turnover and/or rents over £10,000, to know exactly what the initiative means for them.

What does MTD entail?

Records now have to be kept digitally and taxpayers have to send quarterly updates with summaries of income and expenditure to HMRC. The requirement is to submit the update within one month after the quarter end. Year-end finalisation of trading results are required by either 10 months after the end of the accounting period, or January 31 following the year of charge of the profits – whichever comes first.

MTD will benefit businesses in a variety of ways:

• Individuals no longer have to give HMRC information that it already has or can easily get from employers, banks, other government departments, etc
• The information that HMRC holds can be easily accessible for individuals to check that their details are complete and correct
• HMRC will collect and process information affecting tax as close to real time as possible, so there is no need for individuals to wait until the end of the tax year to find out how much they expect to pay
• Individuals will be able to interact with HMRC digitally and at a time to suit them
• By 2020, customers will be able to see an extensive financial picture in their digital account, just like online banking

See also: The tax downside of farm diversification

Process

Digital record-keeping means either using MTD-approved accounting software or spreadsheets in conjunction with other software, which use APIs, to allow a flow of data from the business to HMRC (and vice versa). Transactions will need to be analysed in accordance with the categories on the current self-assessment return. Businesses will not be required to keep digital copies of their receipts – it is the transactions that need to be stored digitally.

Key dates

For businesses with turnover that exceeds the VAT threshold, MTD obligations for VAT came into effect from the first VAT return period, beginning on or after April 1, 2019. VAT returns for these businesses should have been filed using third-party commercial software; there is no keying-in of values into HMRC’s online VAT100 form.

VAT-registered businesses with turnover below the VAT threshold can opt-in to MTD for VAT.

MTD for income tax will not be mandated until April 2020 at the earliest; obligations are likely to begin with effect from the first accounting period beginning after April 5 of the relevant tax year that MTD for income tax is introduced.

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