Tax HelpsheetsBack to Helpsheets
An Introduction To Making Tax Digital
An Introduction To Making Tax Digital
What is MTD about?
HMRC's Making Tax digital (MTD) project is designed to assist businesses keep abreast of their tax obligations.
In particular, MTD:
- provides for electronic submission of accurate information to HMRC;
which, in turn
- enables immediate HMRC review of the information; and
- reduces the risk of potential errors arising;
- businesses to obtain a more accurate view of their current tax position.
Broadly, Making Tax Digital (MTD) for VAT applies for VAT return periods commencing on or after 1 April 2019. From that date onwards, most businesses making taxable supplies above the VAT registration threshold - currently £85,000 - are required to submit their return information to HMRC using MTD compatible software.
However, at the end of March 2020, HMRC announced the postponement of phase two of their MTD for VAT project. This 'phase two' requires businesses to digitally link their software all the way from entry of each transaction at one end of the process through to submission of the VAT return at the other, irrespective of how many pieces of software were used.
This means the rules on maintaining digital links from original transaction to tax return will not be enforced until 1 April 2021.
Businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place.
What are digital links?
MTD requires businesses to maintain relevant information about sales and purchases in an electronic format, using 'functional compatible software'. This means a software programme which allows information to be recorded in an electronic form which sends and receives information to/from HMRC using the API platform (including API-enabled spreadsheets). It is possible to use more than one software programme but there must be a digital link between them.
Broadly, the functions of the compatible software must include:
- keeping records in a digital form as required by regulations;
- preserving digital records in a digital form as required by regulations;
- 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 in relation to a relevant entity's compliance with obligations under the regulations.
Digital records can be kept in a range of compatible digital formats. They do not all have to be held in the same place or on one piece of software. For example, a spreadsheet can be a component of digital record keeping provided the product that consolidates records, or summary records from the spreadsheet, can exchange data digitally with HMRC.
The regular VAT penalty regime for missing any MTD obligations came into play on 1 April 2020.
Are there exceptions to MTD?
Yes. The exception is a small minority of VAT-registered businesses with more complex requirements.
What are these exemptions?
You will not have to follow the Making Tax Digital rules where HMRC is satisfied that:
- Your business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers)
- It is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason
- You are subject to an insolvency procedure
These may apply even if you are not currently exempt from online filing for VAT.
Does anything remain unchanged under MTD?
Yes. What won't have to change is the kind of information you send to HMRC or when you need to send it. You will, however, need the right kind of software to do it.
What kind of software is that?
A software product or set of products, that support the MTD obligations of keeping digital records and exchanging data digitally with HMRC through the MTD service.
What is bridging software?
Bridging software is how HMRC describes the digital tool that can take information from other applications, for example, a spreadsheet or an in-house record keeping system and then lets the user send the required information digitally to HMRC in the correct format.
What information needs to be recorded?
The time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged, business name and principle business address as well as your VAT Registration Number and details of any VAT accounting schemes you use.
What's this about digital records?
Digital records can be kept in a range of compatible digital formats in various places and different software. For example, a spreadsheet can be a component of digital record keeping, provided that the product which consolidates records or summary records from the spreadsheet is digital.
Can you continue to record daily totals?
Yes, but they have to be captured digitally. If you use spreadsheets to keep business records, you'll need MTD-compatible software so that you can send HMRC your quarterly VAT returns and receive information back from HMRC.
What is the next phase?
Making Tax Digital for Income Tax
Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6 April 2024.
Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.
At Spring Statement 2019 the Government announced that it would not be mandating MTD for any new taxes or businesses until at least 2021. UK resident sole traders and landlords can sign up to join the pilot for MTD for income tax.
For more details visit this dedicated HMRC page here or give us a call.