HMRC’s vision to digitalise the UK tax system is well underway. The transformation will start with Making Tax Digital (MTD) for VAT from April 2019. Here are some Making Tax Digital – FAQs to help you understand and prepare for the transformation.
Making Tax Digital – FAQs
What is Making Tax Digital?
Making Tax Digital is the Government’s plan to modernise and digitalise the UK tax system.
The Government’s ultimate intention is that:
HMRC will collect and process information affecting tax liabilities as close to real time as possible;
All taxpayers will have digital tax accounts, where they will be able to see all the information that HMRC holds.
What will Making Tax Digital mean for businesses?
The Government wants to ensure that businesses maintain digital records, and that they provide information directly to HMRC from these digital records on a regular basis.
Starting from 1 April 2019, VAT registered businesses with turnover above the VAT threshold of £85,000 will need to maintain digital VAT records, and use these records to meet their VAT reporting requirements.
I am currently exempt from submitting my VAT returns online – will this change?
No. The exemptions under Making Tax Digital mirror the existing VAT online filing exemptions.
Can I be exempted from the scheme?
If you can’t use a digital system because of your age, a disability or because of where you live (e.g. you don’t have internet access), or if you object to using computers on religious grounds you will be able to apply to HMRC for an exemption from the scheme.
Can I still keep my records manually and simply file the VAT return through the HMRC VAT portal?
No. The new regulations state that businesses must keep digital records in compatible software, which can connect to HMRC via an Application Programming Interface (API).
Do I have to purchase a software package?
The regulations state that a business in scope for MTD must use functional compatible software to meet the new requirements. If you haven’t got one in place already then yes you will need to purchase compatible software.
What is ‘functional compatible software’?
Functional compatible software means a piece of digital software that records business transactions electronically and which can directly communicate with HMRC digitally via their API. HMRC approved MTD compatible software is here.
Do Excel spreadsheets count as ‘functional compatible software’?
Using them standalone, no. However HMRC has stated that records can be maintained on spreadsheets, but there has to be some bridging software that can communicate with HMRC’s API in order to comply with MTD for VAT.
What information will I need to keep digitally for VAT purposes?
You will need to keep a record of all sales and purchases so that the totals for applicable VAT outputs and inputs can be calculated for each return period.
Additionally, the underlying records need to include the transaction date, the rate of VAT that applies and the invoice total.
There are some exceptions for users of different VAT schemes. For example:
Retail scheme users will, by HMRC notice or direction, be permitted to record electronically sales transaction data based on daily gross takings, rather than recording details of each sale.
Flat Rate Scheme users keep records of sales but the only records of purchases they must keep are those relating to capital goods with a VAT inclusive value of £2,000 or more.
I currently submit my VAT return monthly or annually. Will I have to move to quarterly reporting?
No. Businesses that have alternative reporting arrangements will carry on as they are. Businesses submitting monthly or non-standard returns will continue to do so as long as they keep digital records and submit their annual or monthly VAT return through functional compatible software.
How long to I need to keep digital records for?
Businesses will need to keep digital records for up to 6 years.
If we go digital do we still need to keep paper records?
No. HMRC have informed businesses that scanned or photographed invoices as long as the image is clear, legible and all information is recorded, will be accepted.
What happens if I don’t / can’t comply?
Penalties will apply for businesses that do not comply with the MTD regulations. HMRC have stated there will be a soft landing period for penalties to allow businesses time to update their systems and fall into line with the new requirements.
Will the Making Tax Digital regime be extended in future to cover other taxes?
Yes. HMRC have informed business owners that if this works well the plan would be extend to other taxes but not before April 2020.