The Government objective in introducing Making Tax Digital (MTD) is primarily to close the tax gap, whilst making it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC believes that, through error or mistake, a considerable amount of tax is lost to the Exchequer. It is thought the introduction of MTD will reduce this loss, whilst also increasing productivity and efficiency through digitisation.
The introduction of MTD for VAT is only the beginning. In the next few years, digital accounting rules will be rolled out for Income Tax and for Corporation Tax, including quarterly reporting. Ultimately, MTD is much more than how businesses file their VAT returns, it is a fundamental change to the record keeping requirements for business tax records. Leading accountants believe it should have been called making business digital.
A survey by the ICAEW in July 2018, found that only 16% of businesses filed their VAT returns via their accounting software with the vast majority manually entering the 9 boxes on the VAT return section of the gov.uk website. The survey also found that over half the VAT registered businesses had no idea of the forthcoming changes which are almost upon us.
When does MTD for VAT come into effect?
MTD’s scheduled start date is 1 April 2019 and it will apply to businesses in their first VAT period starting on or after 1 April 2019. HMRC have stated there will be a soft landing period of one year during which a “light touch” will be applied.
For specialist entities, HMRC have recently put back the scheduled start date to 1 October 2019. Among others these include trusts, not for profit organisations, and VAT groups. HMRC have written to each of the entities involved to advise them.
MTD VAT requirements at a glance
From the 1 of April 2019, businesses in MTD for VAT will be required to maintain their accounting records digitally in a software product or spreadsheet. In addition, they will have to submit their VAT returns to HMRC using MTD compliant software via a digital link. There are still no requirements to digitalise the source documents e.g. the receipt or supplier invoice.
In terms of what isn’t changing, HMRC will not be able to see more than they already do today. The underlying VAT rules are also not changing, neither is the amount of information submitted to HMRC or the current filling and payment deadlines.
Who does it apply to?
MTD will apply to all businesses that are VAT registered and have a turnover of over £85,000 per annum. Businesses that are VAT registered but have a turnover of less than £85,000 can continue to use the uk.gov website and manually enter the nine VAT boxes. Alternatively, they can elect to enter the MTD regime.
Businesses can determine whether they meet the turnover test by looking back at the previous 12 months from the end of a VAT period and include standard, reduced rate and zero-rated supplies but exclude exempt supplies. It is worth noting that businesses in the MTD regime will remain in even if their turnover falls below £85,000 per annum.
Who is exempted?
If you are VAT registered and over the turnover limit then you can only be exempted on a) religious grounds, in certain circumstances or b) if you are digitally excluded which means those for whom it is not reasonably practicable to keep electronic records or make a return under Making Tax Digital because of age, disability or remoteness of location.
Want to find out more information about the new MTD changes?
Please check out HMRC guidance for VAT notice 700/22 and the ICAEW at www.icaew.com/technical/tax/making-tax-digital/mtd-guidance/mtd-and-vat.