Making Tax Digital (MTD) is the government’s plan to transform the tax system and move it online. MTD was brought in for all VAT registered businesses starting in April 2019.
Below we’ve put together a Making Tax Digital content hub for businesses with the information they need plus answers to all frequently asked questions in the topic.
What is MTD?
Since 1st April 2019, VAT-registered businesses have had to keep their VAT records digitally, and automatically submit their VAT returns to HMRC through ‘MTD compatible software’.
If you’re VAT registered, or close to the VAT threshold, and you don’t currently use a digital accounting package (such as Crunch) to record your VAT information, then you need to ensure you’re ready for MTD now.
How do I get ready for Making Tax Digital for Business?
As we mentioned above, VAT-registered businesses above the VAT now have to report and pay any VAT due quarterly and ensure their records are stored digitally and sent to HMRC using MTD-compliant software. The days of just using excel spreadsheets or actual books are over!
The dates for introducing MTD for further taxes, including Corporation Tax for limited companies, and Income Tax and National Insurance for sole traders, have been put back repeatedly and it’s not sure when they may be introduced.
The most recent update from HMRC was the ‘Making Tax Digital for Business Stakeholder Communication Pack’ in July 2018. This confirmed HMRC had opened an MTD pilot for Income Tax for sole traders with income from one business or landlords who rent out UK property (excluding furnished holiday lettings).
The pilot allows people who meet the criteria to voluntarily use MTD-compliant software to keep their business records digitally and send Income Tax updates to HMRC quarterly, instead of filing an annual Self Assessment tax return. Users of the pilot will receive an estimate of their tax liability throughout the year. At the moment, the system isn’t able to be used by those with more complex Self Assessment returns.
Businesses, sole traders, and limited companies, with turnover above the VAT threshold (£85,000 per year for the 2020/21 tax year), now have to store and submit their records digitally.
How do I prepare for Making Tax Digital?
If you aren’t a Crunch client and your business is VAT-registered, you can catch up with our recent 15-minute webinar and Q&A on Making Tax Digital. Our experts answered questions and explained what actions you need to take to be prepared for the new MTD reporting requirements.
Do I have to register for MTD?
If you are above the VAT threshold then you have to register for VAT, include VAT on all your sales invoices, and submit quarterly returns to HMRC. If you’re using software for your business finances then your software provider should be looking after all of this for you. Crunch software has been compatible with MTD requirements since April 2019. If you’re not yet using software, then you’ll need to ensure your records are stored digitally and your VAT return is filed online to HMRC using MTD-compatible software.
What if I'm voluntarily registered for VAT - do I still need to file using MTD?
If you are VAT-registered voluntarily – i.e. your company’s taxable turnover is below the £85,000 threshold – you will need to follow the MTD rules from 1st April 2022. At Crunch, we sign up all of our VAT-registered clients for MTD for VAT regardless of their turnover and whether their registration is voluntary or mandatory.
HMRC requires you to register for VAT if you exceed the threshold over a rolling 12-month period, or if you expect to exceed the threshold over the next 30 days. So you must keep your business’ level of turnover under close review.
Do you know what your business’ turnover is? If not, maybe you should use online accounting software like Crunch that gives you a clear picture of your finances.
What is MTD-compatible software?
The MTD rules say you must use ‘Functional Compatible Software’ - that means a software program, or set of programs used to keep digital records, send information and returns automatically from data held in the digital records, and receive information from HMRC via an Application Programming Interface (API).
If you currently use Excel to capture information about your business’ VAT, then at the very least you would need API-enabled bridging software to connect to HMRC systems. However, you will probably find it easier to use an approved software provider like Crunch.
What records do I need to keep digitally?
You need to store the following standing data as specified by HMRC:
- Your business name
- Address of your principal place of business
- VAT registration number
- A record of any VAT accounting schemes used
For each supply you make to customers (output VAT):
- The date of supply
- The value of the supply
- The rate of VAT charged
For each supply you receive (input VAT):
- The date of supply
- The value of the supply including any exempt or zero rated VAT
- The amount of input tax that you will claim
Your VAT account, including:
- The output tax due on sales
- The output tax due on acquisitions from other EU member states
- The tax payable on behalf of your supplier under a reverse charge procedure
- The tax that needs to be paid following a correction or error adjustment
- The input tax claimable from business purchases
- The input tax allowable on acquisitions from other EU member states
- The tax reclaimable following a correction or error adjustment
- Any other necessary adjustment required by VAT rules.
When do I need to start keeping digital records?
Digital records have been required for VAT-registered businesses with taxable turnover above the VAT threshold of £85,000 since 1st April 2019. From 1st April 2022, all VAT-registered businesses, regardless of turnover, must keep digital records.
When do I need to have MTD-ready software in place?
The first changes were introduced on 1st April 2019 and affected VAT-registered businesses with a taxable turnover above the £85,000 VAT threshold. These businesses now store and submit their VAT information via compatible software that connects to HMRC systems. From 1st April 2022, all businesses who are registered for VAT, even if their taxable turnover is below the threshold of £85,000 must follow the MTD rules.
What is the soft landing period?
For VAT periods starting in the 2019/20 tax year, businesses will not need to have digital links for all software and will be able to manually transfer or cut and paste their records instead.
However, this does not include the submission of the VAT return itself, which **must **be shared with HMRC using an API.
For MTD, Businesses must have digital record keeping in place, and an** API-enabled product** ready to send their VAT returns after 1st April 2019.
Does MTD affect me if I'm a sole trader?
Yes. MTD rules apply to sole traders.
Does MTD mean extra admin for business owners?
Most business owners have found that by using MTD-compatible software for VAT, their admin burden has been reduced.
Are there fines if I don’t comply?
Yes. All businesses required to follow MTD rules must submit their VAT information to HMRC using compatible software. You will face fines and penalties if you don’t.
Will MTD extend to other taxes other than VAT?
The government is extending the MTD rules to include the submission of information about Self Assessment tax returns (by 2024) and Corporation Tax (date to be announced).
When and how can we register for MTD?
The MTD for VAT service opened for business in April 2020. Businesses can sign up for MTD via the GOV.UK website.
Businesses that have an agent should discuss with their agent and ensure that actions are aligned. Businesses should only be signed up when they are ready, i.e. they have digital records and MTD-compatible software.
I’m still using accounts, ledgers, and paper receipts. Does that mean I have to change my whole accounting system?
If the MTD for VAT rules apply to your business, you must submit information to HMRC digitally using compatible software, which could include spreadsheets with a digital link.
Paper invoices would remain valid, but if all the information is in the digital records they would not need to be retained.
Does digital record-keeping go so far as having to keep a digital copy/picture of receipts even if they are entered into accounting software?
If all the required information is held within the accounting software then there would be no need to keep copies.
Do we need to scan and store images of purchase invoices and expense receipts on our MTD-compliant system?
If the required information is held within accounting software there is no need to keep further copies. If you choose/need to keep copies, these can be paper or digital.
Making Tax Digital - Our analysis
Change can be a worry, but in our analysis, the initial VAT element of MTD for businesses isn’t going to be much of a bother for the vast majority of affected businesses. If businesses haven’t started to use approved software to store and submit VAT information to HMRC, they’ll need to start making plans to do so ahead of 1st April 2019.
Many people are worried about what additional plans HMRC has for MTD. Others are concerned about the added complexity this might introduce for their business, or the adverse impact on cash flow with tax payments due sooner. If HMRC extended MTD to include personal tax information, this would affect the 10 million people who currently submit an annual Self Assessment return. So it’s perhaps unsurprising the government has delayed implementing MTD more widely for the time being.
Far from introducing more paperwork, we think these potential changes are a welcome modernisation of the UK tax system. In fact, it’s just catching up with where taxes should be. Many UK businesses already report VAT quarterly and pay it soon after filing. In much of Scandinavia and Central Europe, digital tax accounts with monthly or quarterly filing have long been the norm, as has been paying tax more quickly.
We believe that little and often in terms of tax filings is preferable to an annual process. HMRC’s roadmap initially set out their plans to connect the many systems they use far more effectively, with more information pre-populated when returns are requested. Although this has largely been put on hold, we still believe this new arrangement will result in less time and effort to prepare and file tax returns for business owners and individuals.
Ultimately, if you’re using online accounting software like Crunch to manage your business accounts, then you’ll see little difference. Crunch will integrate with whatever new technology HMRC introduces, whilst continuing to give you a live view of your tax position as we always have. As long as you keep putting your invoices and expenses into the system, online, or using our apps, all will be well.
Crunch will continue working to ensure all of our knowledge and experience about small businesses is fed into HMRC’s future development of MTD.