Making Tax Digital (MTD) and all you need to know about it

Under Self-Assessment over 10 million customers fill in a tax return to tell HMRC about their circumstances and income. Mistakes can be made as the formation can be wrong or submitted too late, meaning the right tax is not collected at the right time and HMRC has to act. This can be a burden for customers and inefficient for HMRC as well.

The Government in its budget 2015 proposed the transformed tax system as it is committed to ensure that they can deliver a modern tax digital system for all businesses and their agents. This will apply to businesses with turnover above the VAT threshold (currently £85,000). Businesses with turnover below the VAT threshold will not be required to use the system but can choose to do so to support them to get their tax right and it will also reduce the amount of tax lost through avoidable error. The government will not widen the scope of Making Tax Digital beyond VAT before the system has been shown to work, and not before April 2020 at the earliest.

The businesses will need to start using digital accounting system so they can upload their financial information. That means if tax is going digital so should the book keeping It won't be too much of a transition if they are already using an accounting software but if they are using excel they will need to transfer their information in a digital system. Currently Only 54% of VAT registered businesses use accounting software. The proportion of all businesses relying on paper-based records alone remains unchanged at 25%, and this includes 13% of those businesses that will need to implement MTD for VAT. According to a research by ICAEW 20% of the clients will be buying new accounting software and 15% have already done so. This software will be linked to HMRC systems, allowing customers to send and receive information directly from their software.

Data will have to be updated in the MTD interface at least once a quarter. This will increase the efficiency as the clients will be updating their tax information periodically throughout the year. The clients might even find themselves paying less tax because they will be keeping their records up to date and the filing will be more streamlined.

The real time aspect of MTD will mean the businesses will no longer need to wait until the end of the year to learn how much they owe on their tax bill, giving them a much better sense of how their tax obligations are shaping up during the year. Every time data is uploaded into the MTD interface, it will automatically calculate the amount of tax they need to pay. This will also help business owners and their accountants in making more informed financial decisions for their businesses.

As the implementation of MTD is coinciding with the Brexit some things will have to be taken in view as right now the sales and purchases from the EU are fairly straightforward and understood. Apart from administrative obligations the VAT and customs position are greatly simplified. After Brexit The VAT liability of some transactions might change as well as the reporting obligations. Businesses relevant personnel should make sure that they understand the tax-technical and administrative changes caused by leaving the EU.

An agent's abilities should be mirrored with their clients under MTD, as at present the agents can maintain the accounting records, submit the VAT return data to HMRC etc. 

If no affordable options are made available by software companies, government will either need to subsidise software upgrades for businesses or they need to further delay implementation.

However, In April 2019, when MTD for VAT comes into effect, HMRC anticipates that there will be a one-year 'soft landing' period, when penalties for record keeping will not apply.

Records kept digitally must include such information as:

  • designatory data - the name of the business, its address, VAT registration number and a record of any VAT accounting schemes used
  • the VAT account (as outlined later)
  • information in regard to supplies made and received
  • the totals of any adjustments
  • a record of Daily Gross Takings if the business is using a retail scheme.

Digital records must be maintained for the VAT account (and the audit trail between primary accounting records and the VAT return). The records should include details of both the VAT payable portion and the VAT allowable portion.

Taxaccolega Chartered Certified Accountants in Croydon can guide you and assist your business in adopting new MTD rules to be kept all up to date and be able to meet the new compliance. Please feel free to contact us on or call on 02081270728 for further help.

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