Making Tax Digital (MTD) is the UK Government’s plan for making HMRC the most digitally advanced tax administration in the world.
From 1 April 2019 most businesses above the VAT threshold of £85,000 are required to keep their records digitally and submit their VAT return using compatible software.
VAT-registered businesses with turnover of above £85,000 will need to file their VAT returns digitally from April 1st 2019, with all small businesses set to be affected by April 1st 2020.
HMRC have written to every business to tell them how to prepare and where to get more information.
They’ve also worked extensively with stakeholders and software developers to shape the design of the service, so you may well have heard from your accountants or accounting software. about how Making Tax Digital will affect you.
In fact, according to HMRC 8 in 10 of the businesses required to join were aware of MTD, and 83% of them had already started to make preparations.
However, if you’re still not sure what Making Tax Digital is or want to know more about the changes, read our Making Tax Digital guide below.
- 1 What is Making Tax Digital (MTD)?
- 2 When does MTD come into force?
- 3 How do I prepare for Making Tax Digital?
- 4 Will I need to provide more information under MTD?
- 5 What information needs to be provided under MTD?
- 6 Will MTD help reduce tax reporting errors?
- 7 Are small business and freelancers exempt from MTD?
- 8 Are the deadlines for VAT submissions still the same?
- 9 What about VAT special schemes?
- 10 Will I be penalised if I get my MTD returns wrong?
What is Making Tax Digital (MTD)?
From 1 April 2019, MTD for VAT will become compulsory for VAT registered businesses making annual taxable supplies of over £85,000.
New rules will make digital record keeping for VAT compulsory as well as introducing a new requirement to file VAT returns directly from software or a digitally enabled spreadsheet.
Many businesses currently type the figures for their quarterly VAT return directly into a free form provided on the government’s GOV.UK website.
In future all VAT registered businesses within the scope of MTD will have to use software to complete their VAT returns.
When does MTD come into force?
Businesses are required to join MTD and submit their VAT returns using the new service for their first VAT period which begins on or after 1 April 2019.
For the majority, who file quarterly, their first MTD returns won’t be due until August or later.
But remember – businesses will need to have signed up to the service, begun keeping their records digitally and set up their MTD compliant software to send information to MTD, in good time before they file their first return under MTD.
Even if you’re exempt now, all small businesses will be part of the scheme by April 1st 2020.
How do I prepare for Making Tax Digital?
Here are some tips to help you get ready for Making Tax Digital:
- You don’t have to sign up to MTD from day one, but you do need to make sure you are keeping your VAT records digitally from the beginning of the period starting on or after 1 April 2019 (if you don’t yet have software there is more information on this below).
- Before you sign-up for MTD, file your last return for the period before you have to join MTD using the old service, as once you are signed-up you will no longer be able to access that service
- If you pay by Direct Debit wait until that payment has been collected to sign up – this will ensure that your payment details are transferred over to the new system
- You should sign-up for MTD at least a week before your filing deadline so that you are registered for the new service in good time to submit your return. You will need the following information to hand when signing up:
- your HMRC Government Gateway User ID and password you currently use to do your VAT
- your VAT registration number
- the date you became VAT registered
- the UK postcode of where the business is registered for VAT
- the box 5 figure from your latest VAT return submitted to HMRC
- as a sole trader your National Insurance number, full name and date of birth
- for a limited company, the company number supplied by Companies House and the company unique Taxpayer Reference (UTR) number
- for partnerships, the unique self-assessment Taxpayer Reference (UTR) number and the UK postcode for where the partnership is registered
- your business email address
Once the above details are submitted you receive a reference number. Make a note of this and use it if you need to contact HMRC.
Within 72 hours you will receive an email to confirm that you have been successfully signed up and are ready to submit using MTD compatible software.
- If you already use software to keep your VAT records, contact your software provider to make sure it is MTD-compatible and find out what you need to do to enable the new features once you have signed up to MTD.
- After signing-up, you will need to link your software to MTD – a process known as ‘authorising’ the software.
- If you use an accountant or other agent to manage your VAT affairs speak to them as they will be aware of MTD and will probably have already started making preparations on your behalf.
- If you are not represented by an accountant and/or do not already use software, you will need to look at how to capture your records digitally and choose MTD-compatible software
HMRC recognise this is a major change for some businesses. Where businesses are doing their best to comply with the new rules HMRC will take a light touch approach to penalties in the first year but you must ensure your payments continue to reach HMRC on time. If you do have problems help and support is available and you can contact the VAT online services helpdesk on 0300 200 3701.
Will I need to provide more information under MTD?
No business will need to provide information to HMRC more regularly than they do now, nor send any additional information.
However, all VAT returns have to be filed through HMRC’s new MTD APIs (the interfaces that enable accounting systems to communicate with HMRC’s systems) instead of through the existing portal.
What information needs to be provided under MTD?
While businesses will need to keep a record of all their transactions in MTD-compatible software, HMRC only requires summary data in each VAT submission. This takes the form of the familiar nine boxes on the VAT return:
- VAT due on sales and other outputs
- VAT due on acquisitions from other EC member states
- Total VAT due (the sum of boxes 1 and 2)
- VAT reclaimed on purchases and other inputs (including acquisitions from the EC)
- Net VAT to be paid to Customs or reclaimed by you (Difference between boxes 3 and 4)
- Total value of sales and all other outputs excluding any VAT
- Total value of purchases and all other inputs excluding any VAT
- Total value of all supplies of goods and related costs, excluding any VAT, to other EC member states
- Total value of acquisitions of goods and related costs, excluding any VAT, from other EC member states
Under MTD you will also be required to store certain information digitally. This should include:
- the time of supply (tax point)
- the value of the supply (net excluding VAT)
- the rate of VAT charged
If you need to make adjustments to your VAT figures (for example, if your client is partially exempt from VAT) the calculations and supplementary data that get you to your final figures don’t have to be stored.
There is no additional information you or your clients need to store or submit for MTD for VAT; however, this information now needs to be stored digitally.
Will MTD help reduce tax reporting errors?
Keeping records on paper and submitting VAT returns to HMRC manually results in errors – in a YouGov poll 61% of businesses said they have previously lost receipts – and errors also occur in the manual transposition of data and manual calculations.
MTD offers a more integrated approach to business administration and tax, reducing the time businesses spend on administration in the longer term and making it easier for them to get their tax right.
Are small business and freelancers exempt from MTD?
The smallest businesses are already exempt from MTD.
Only those with taxable turnover above the VAT threshold of £85,000 are required to join MTD, although the c.1m VAT registered businesses below the threshold can choose to join voluntarily.
Businesses that cannot go digital will not be required to do so.
Are the deadlines for VAT submissions still the same?
Yes, after the MTD for VAT deadline the payment deadlines and the frequency with which businesses have to file VAT returns will be the same as they are right now.
This applies to monthly, quarterly and annual VAT return schemes.
You will continue to make error corrections on VAT returns on the following quarter’s VAT return or by writing to HMRC.
What about VAT special schemes?
Eligibility for VAT special schemes, such as the flat rate scheme, will remain the same. Businesses eligible to submit annual VAT returns will still be able to do so under MTD.
Will I be penalised if I get my MTD returns wrong?
HMRC recognises that businesses will require time to become familiar with the new requirements of MTD.
HMRC have said that they remain committed to their light touch approach to penalties for the first year, ensuring customers are supported in their transition to MTD.
During the first year of mandation HMRC will take a light touch approach and will not issue record keeping and filing penalties where businesses are doing their best to comply with the law.
If a business receives a penalty of any other type, for example for late payment or for inaccuracy, and believes the failure was due to problems arising from the transition to MTD, they have the right to appeal against the penalty and all relevant factors, including any transitional issues, will be taken into consideration.