Our Comprehensive Guide to Making Tax Digital | Aston Shaw

Our Comprehensive Guide to Making Tax Digital

April 2019

Making Tax Digital (MTD) is the name of the Government’s ambition to change the way in which we record financial data and report this information to HMRC. It requires taxpayers to keep digital records, instead of manual ones, and communicate with HMRC using a different reporting system to that which is currently in operation.

Why Has It Been Introduced?

HMRC’s goal is to become one of the most digitally advanced tax administrations in the world in order to save time and money whilst better reflecting the digitised society we live in.

Recent reports suggest that HMRC lose approximately £9bn per year in avoidable tax reporting errors and is therefore keen to ensure it collects what is owed.

It hopes that by making digital recording mandatory, this will reduce calculating and reporting errors resulting in more money for the Treasury, whilst at the same time decreasing the need for tax checks and investigations.

What Taxes Are Affected and from When?

VAT is the first of the taxes that will be affected by the new recording & reporting rules of MTD and VAT-registered entities will need to ensure they are prepared for the changes that come into force from 1st April 2019.

Income Tax and Corporation Tax are expected to be next in line for the changes, although HMRC has recently confirmed that this will not be any time before 2021.

So What Must I Do?

There are four key stages you must follow to ensure you are compliant with the new MTD rules:

1. Determine if and when you are affected by MTD

At present only VAT-registered entities need to ensure they are compliant with the new MTD rules. If you are not a VAT-registered entity, MTD will not affect you for the time being.

If you are a VAT-registered entity, then you will be affected by one of the three deadlines below:

1st April 2019 – VAT-registered businesses, companies, landlords and charities with annual taxable supplies (i.e. sales subject to VAT) above the VAT registration threshold (currently £85,000 within any 12-month period) are to report digitally for VAT purposes only (i.e. no other taxes) for VAT Return periods starting on or after 1st April 2019.

Example – Susan owns a VAT-registered salon business that regularly turns over £100,000 per year. She has VAT quarter periods ending on 28th February, 31st May, 31st August and 30th November. Therefore, the first VAT quarter return that she will have to file under the new MTD rules is that ended 31st August 2019, as this is the first return that starts on or after 1st April 2019.

1st October 2019 – VAT Groups, trusts, non-company ‘Not-For-Profit’ organisations, public sector entities, local authorities, public corporations, entities based overseas, entities paying VAT payments on account and entities using the annual accounting scheme with annual taxable supplies above the VAT registration threshold are to comply from VAT Return periods starting on or after 1st October 2019.

Please note that if you fall within this category, HMRC should have sent you a letter to confirm your obligation to comply with the new MTD rules from this date. This letter carries the force of law therefore if you have not received this letter and feel as though you should have done, you will need to contact HMRC to request it otherwise HMRC will be expecting you to comply with MTD from 1st April 2019.

Example – ABC Ltd is part of a VAT group with EFG Ltd & XYZ Ltd. Together their quarterly VAT returns end on 31st January, 30th April, 31st July and 31st October. Therefore, the first VAT quarter return that they will have to file under the new MTD rules is that ended 31st January 2020.

1st April 2020 – Voluntarily VAT-registered entities with annual taxable supplies below the VAT registration threshold are to comply from VAT Return periods starting on or after 1st April 2020.

Example – John is a woodland consultant and is voluntary VAT-registered. His VAT quarter periods end on 31st March, 30th June, 30th September and 31st December. Therefore, the first VAT quarter return that he will have to file under the new MTD rules is that ended 30th June 2020.

2. Choose your MTD-Compatible software system

Once you have identified from when you are affected by MTD, you will need to start recording your financial data digitally on an MTD-Compatible software system or combination of systems.

Regardless of what system you choose to use, you must keep the following data digitally on that system:

Whilst the above seems like quite a comprehensive list, almost all of this information can easily be found on the invoices/receipts you give and receive.

When it comes to choosing a suitable software system, whatever you decide must perform three key tasks in order to be deemed MTD-Compatible:

You realistically have four options when it comes to choosing your MTD-compatible system:

a) Use desktop software (e.g. Sage 50 Accounts)

You enter the transactions manually or via an upload onto the software, which will then calculate your VAT liability for you and send the data to HMRC through your internet connection.

Advantages

Disadvantages

b) Use a spreadsheet and bridging software (e.g. Excel & Vital Tax)

You enter the transactions manually onto a spreadsheet and create formulae that will calculate your VAT return box 1-9 figures. You then instruct a bridging software product to extract the box 1-9 figures directly from the spreadsheet and send this information to HMRC via your internet connection.

Advantages

Disadvantages

For clarity, bridging software is simply a digital stepping stone between your data and HMRC. A demonstration video of how bridging software operates can be seen here: https://youtu.be/8OpkmJEHPag.

c) Provide Aston Shaw with your manual or digital records

If we are authorised to look after your VAT affairs, we can ensure your data is recorded and reported digitally on your behalf via our choice of bridging software.

Advantages

Disadvantages

d) Use cloud-based accounting software (e.g. Xero, QuickBooks Online, FreeAgent)

Similarly to desktop software you enter your transactions manually or via an upload. The cloud software will then calculate your VAT liability for you and send the data to HMRC through your internet connection.

Advantages

Disadvantages

If you decide to use more than one piece of software to comply with MTD, be aware that the link between these software products must be digital.

Example – Frances records her transactions onto Sage 50 which calculates her VAT return each quarter. In order to avoid paying the cost of the MTD upgrade for her Sage product, Frances decides to use a spreadsheet and free bridging software to upload the VAT return to HMRC.

Not Allowed – She types the figures that Sage has calculated into her spreadsheet ready for forwarding to HMRC via her bridging software product.

Allowed – She downloads the VAT return from Sage as a spreadsheet file. The bridging software can then select the data from this file that needs to be sent to HMRC.

In summary, you can manually enter the details of your transactions at the beginning of the data reporting process only. Once entered, it is down to your software systems to carry the data across to HMRC.

We recommend that you speak to your client manager about which option to take. In the meantime, you can find all the HMRC-approved MTD-compatible software products available here.

3. Register for MTD with HMRC

Even if you are already submitting your VAT returns online via desktop or cloud-based accounting software, you will need to register for the new MTD system with HMRC.

If we look after your VAT affairs already, we will register you on your behalf when required for a small fee, although all of our MTD-affected clients will be contacted by us during April 2019 with the chance to opt-out of this service.

If you wish to register yourself with HMRC, you will need to log-in to your HMRC account using your existing Government Gateway ID and notify HMRC that you are ready to go digital for VAT.

We recommend that you only do this when you are ready or obliged to do so as once registered, you cannot return to reporting VAT using the existing reporting method.

Be wary that if you pay your VAT liability via Direct Debit, you will not be able to register for MTD 15 working days before OR 5 working days after the VAT return filing deadline.

Example – Maria’s quarterly VAT return period ends on 30th April 2019. Therefore, we would recommend that she registers for MTD between 15th June and 1st August 2019.

Alternatively, you can ask us to register you; simply speak to your client manager.

4. Authorise your MTD-compatible software system to communicate with HMRC

Failure to do this will result in your software system being unable to submit your VAT return to HMRC under the new MTD system.

Speak with your software provider or ask your accountant for guidance on how to do ensure your software is activated.

Make sure that whatever system you decide to use, it is able to communicate with HMRC under the new MTD rules, as some software developers have no intention of ensuring their products are going to be MTD-ready.

 

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