1. Introduction and outline of Making Tax DigitalBefore we get to grips with the practical issues and finer points of Making Tax Digital (MTD) it’s worth explaining the government’s plans for it and what MTD really means. It has already had a far wider impact than just tax. It will change the way you access information on other government services, such as some state benefits, and it may mean radical changes to how you keep your records.In this first section we look at the practical issues of MTD for businesses and business owners, especially those who are not used to keeping digital records or using bookkeeping or accounting software. Reading this short section will help you understand the detailed information given later. This section also explains:
- why MTD is being introduced
- when it will apply to you
- how HMRC views it; and most importantly
- how your record keeping will fit with MTD for VAT and MTD for business.
What is Making Tax Digital?As the name suggests, MTD is HMRC’s plan to remove, as far as possible, paper documents from the tax system. The headline features include new obligations for businesses and business owners to maintain and transmit their business records for direct tax purposes to HMRC far more frequently than under the current regime, which only requires annual accounts and tax returns. Essentially, the days of keeping books in manuscript will end. We outline the steps to take to move bookkeeping & accounts to The Cloud here >>MTD doesn’t stop there. Individual taxpayers will also have their tax affairs digitised and automated ultimately leading to a radical change, and the end of the self-assessment system for most taxpayers. This will involve much of the information needed for your tax returns being obtained direct from employers, banks and other investment institutions and used to pre-populate the entries on tax returns.When it was announced in 2015 it was unclear how far reaching MTD would be. In December 2015 HMRC published its “Making Tax Digital roadmap”, a document which set out in vague terms the goals of MTD and a broad timetable for achieving it.It didn’t take long before the sheer scale of what was envisaged resulted in major objections, especially from the accounting and tax professions. The government threw the onus onto software producers, as they would have to create or adapt their bookkeeping and accounting software for businesses to fit with a brand new HMRC system that only existed as a vague theory. Naturally, there was a lot of scepticism about MTD and there still is. However, make no mistake, MTD is happening and the first element – MTD for VAT – went live in April 2019 and many businesses already have to comply. The timetable for other parts of MTD is still in doubt. HMRC and the government announced in April 2019 that there would be no further rolling out of MTD until at least April 2021.
Does MTD have any advantages for businesses?According to HMRC, MTD has some significant advantages for businesses. In reality, while we agree that keeping good financial business records is never a bad thing, HMRC’s view of the effects of MTD put a rosy and unrealistic spin on it. For many businesses, especially smaller ones, complying with MTD represents a sea change in the way they tackle their record keeping and will be a significant extra burden, at least in the short term. Plus, there will be extra cost plus time and resources required. It’s impossible to say how much as it depends how you currently keep your business records.Ignoring the costs involved for now, below is a summary of what HMRC sees as the key advantages of MTD. These we can broadly agree with, albeit less enthusiastically than HMRC.1. Better use of informationYou won’t have to give HMRC information that it already has, or that it is able to obtain from elsewhere, for example employers, banks, building societies and other government departments such as the Department for Work and Pensions.
2. Tax in real timeHMRC will collect and process information – or you will need to provide it in digital form – affecting tax as close to real time as possible, to help prevent errors and stop tax due or repayments owed building up.3. A single financial accountBy 2020 you will be able to see a comprehensive financial picture in your digital account, just like you can with online banking. To some extent this is already available, for example, if you have a “personal tax account” with HMRC you access lots of financial information from a single page; for example what tax you owe, current tax code (if you’re an employee), tax credits claim, child benefit entitlement, current state pension rights, etc. (see Appendix A).This is one aspect where MTD works well, and we recommend signing up for a personal tax account if you haven’t already. You can do this by visiting GOV.UK at https://www.gov.uk/personal-tax-account and following the on-screen guidance.Note. The logging in process can be tricky but is improving all the time.4. Interacting digitally with youYou and your accountant will be able to communicate with HMRC digitally, which means you won’t be limited to office hours. Digital record keeping software will be linked directly to HMRC systems, allowing you to send and receive information directly from its software.
What are the different elements of MTD?Currently there are three elements to MTD:
- Making Tax Digital for Business (MTDfB)
- Making Tax Digital for VAT (MTDfV); and
- Making Tax Digital for Individuals.The development of each of these is separate with their own timetable.
What is the current timetable for MTD?This is the timetable as it stands:
MTD for VAT – April 2019 Applies to:VAT-registered businesses (unless the October 2019 or a later date applies) with an annual turnover above the VAT threshold (currently £85,000 excluding VAT).MTD requirements by then:
- MTD-compliant software must be used to keep records of VAT transactions. Ultimately, for most SMEs this will be closely aligned with record keeping requirements for MTDfB
- MTD-compliant software must be used to submit VAT returns.
MTD for VAT – October 2019
- not-for-profit organisations that are not companies
- VAT divisions
- companies within VAT groups
- public sector entities that are required to provide additional information alongside their VAT return, e.g. government departments and NHS Trusts
- local authorities and public corporations
- businesses based overseas
- those required to make VAT payments on account
- those who use the annual accounting scheme.
MTD for VAT – later thanOctober 2019 Businesses who use the Government Information and NHS Trust service (GIANT) to report information. As of 1 July 2019 HMRC has not announced the new start date but will write to those affected later in the summer of 2019. MTD for business – April 2021(or later) April 2021 (or later)Applies to:VAT-registered businesses not already using MTD, i.e. those required to use it from April/October 2019 or later. Essentially this is businesses or organisations voluntarily VAT registered which have an annual turnover of below £85,000.MTD requirements by then:
- MTD-compliant software must be used to keep a digital record of VAT transactions
- MTD-compliant software or apps will have to be used to submit VAT returns
- Submitting VAT returns using HMRC’s own VAT online services (currently accessed by logging on to HMRC’s site) will no longer be possibleAfter April 2020Applies to:Sole traders (self-employed individuals), partnerships, landlords and trading companies. The start date will be confirmed (or changed!) only when MTDfV is properly workingMTD requirements: the same as for businesses subject to MTDfB from April 2020
MTD for individuals – No fixed deadline (already exists in part) Applies to:All individualsMTD requirements: as yet there is no indication of any requirements beyond those already existing for self-assessment. But there will be increasing pressure and opportunity to submit and tax forms and communications electronically
How will my record keeping fit with MTDfV and MTDfB?This is a very important question that is key to understanding the finer points of MTD. To answer it you need to understand some bookkeeping VAT and direct tax, i.e. tax on profits, basics and these are used to produce financial records for the creation of the digital reports required by MTD.Direct tax and VAT are governed by distinctly separate rules. This means that what needs to be recorded for VAT by itself is different to what needs to be recorded for general accounting and tax purposes. Nevertheless, in practice when you record a sale or an expense for your business it serves as a record for both VAT and direct tax. For MTD purposes this common ground for transactions is ignored and there are different sets of MTD rules for each. Naturally these overlap because an expense or a sale for VAT is usually also the same for direct tax.
Why are there two sets of rules?While every financial transaction features in some way in your accounts for direct tax purposes, this isn’t true for VAT. For example, employee wages aren’t relevant for VAT, neither is the movement of funds from one bank account to another. Similarly, if your business pays interest on a bank loan it has no bearing on your VAT return but will be vital in determining what your taxable profit is. There are a host of other differences which is why MTD needs a set of rules governing VAT and another governing direct tax records.
What about bookkeeping software and other records?Most bookkeeping software will already handle recording transactions for both VAT and direct tax purposes simultaneously. For example, when you issue an invoice to a customer and record the details using bookkeeping software it will add it to your profit and loss account for direct tax and add the VAT from the invoice to a VAT record (which HMRC refers to as your “VAT account”). The software knows not to include, say, bank interest received in the VAT account because whoever set up the program allocates a code against each type of transaction which tells it to ignore this for VAT but add/deduct it from the profit and loss account. Every type of transaction is allocated this way so that reports can be produced to show your profit or loss, your business balance sheet or a VAT account. What all this means is that if you’re using bookkeeping software MTD will be less of a leap for you.
The big question – can I simply hand over the MTD issue to my accountant?In theory it might be possible, but in practice it won’t be for most businesses as it will be extremely difficult for your accountant to comply with MTD record keeping on your behalf except for very small businesses which have few transactions. However, complying with MTD can be broken down into different roles, and many businesses already follow this approach.Example part 1 – current positionAcom Associates is a small firm with two partners and two employees. Currently one of the partners keeps the business records on a series of spreadsheets and manual ledgers. Software is already used by the partner to prepare the payroll and transmit this to HMRC online each time an employee is paid – digital reports for payroll have been a requirement for over four years and might be seen as a forerunner to MTD.Each quarter the partner pulls together figures relevant for VAT into a fresh spreadsheet (the VAT account) and which adds up totals for each box of the VAT return. After the end of Acom’s financial year he collates the spreadsheets with the documents (invoices, receipts, the payroll digital data etc.) used to create the data and it’s sent to Acom’s accountant. A couple of months later the accounts are ready for approval by the partners and after a discussion with the accountant one or two adjustments are made. The accounts figures are transferred to a partnership tax return and submitted to HMRC.Example part 2 – post-introduction of MTDFor MTDfV there is no reason why Acom can’t continue like this, subject to making some modest changes to how it records financial data to meet the MTD requirements. However, this won’t be possible for MTDfB. The once-a-year accounts doesn’t fit the MTDfB model. This requires quarterly reports and further changes in the way transactions are recorded to meet MTD requirements. The partner concerned doesn’t have the time to devote to this.Example part 3 – the solutionAcom pays a freelance bookkeeper who once a week visits its premises and “writes up the books” using bookkeeping software (which Acom pays and is licenced for rather than the bookkeeper) which is compatible with all elements of MTD. From this she submits the MTDfV reports and the quarterly reports required by MTDfB. At the end of Acom’s financial year she sends the data files and supporting documents to Acom’s accountant. As before he produces the accounts and discusses with the partners and the bookkeeper makes any adjustments needed. Once these are made to the digital records the accountant submits a final MTD report to HMRC on behalf of Acom.This example illustrates one solution to meet MTD requirements. There are alternatives although these might be more time consuming or difficult to adopt, for example:
- the partner could continue to keep business records using spreadsheets and modify them to meet MTDfV and MTDfB requirements and then purchase and use MTD-compatible software to transmit the figures to HMRC for VAT and direct tax quarterly. They could go through the same end of year routine with the accountant
- Acom could send all the data to its accountant each quarter and pay him to use its MTD-compatible software to submit the data to HMRC the accountant might then have all the information to prepare the year-end accounts; or
- the partner could continue to keep the records on spreadsheets and send these to the bookkeeper to enter into her own MTD-compatible software to transmit to HMRC each quarter and pass the information to Acom’s accountant for the year-end routine.Ultimately it doesn’t matter what procedure you use provided that:
- all business transactions are recorded digitally and meet the requirements for MTD
- quarterly VAT and direct tax reports are submitted online to HMRC; and
- the end of year direct tax summary is submitted online.HMRC has published several useful examples of different ways you might organise recording your data and submitting it online. We’ve reproduced these in Appendix A.
How do I submit MTD records to HMRC?You’ll need to have MTD-compatible software that records transactions (that can be a spreadsheet or a bookkeeping app), but the software will need to communicate with HMRC’s system. A program built into your bookkeeping software, or a standalone program, will link your records and transfer them to HMRC’s system. This function is referred to as an “application program interface” (API).If you’re an employer you’ll already be using software to submit your payroll details to HMRC; this also involves an API. While vital to MTD, it’s mainly an invisible part of the process; you, your bookkeeper or accountant will simply click a button when you’re ready to submit your MTD report and the process will be automatic. HMRC’s system will send a message to your software confirming the data has been received safely. This confirmation will also appear in your HMRC online services account. When you log on you’ll be able to see the current state of play with your MTD reports.
What will HMRC do with the data I send?The information transmitted from your digital records via HMRC’s API will be very limited. For VAT it will be basic information about your business, name, registration number, etc., plus the figures for the nine boxes which appear on your VAT return. For direct tax the data sent will be totals and balances for income and expenditure. In other words, for both VAT and direct tax HMRC will only receive summary figures.You might therefore ask why bother with the new tough MTD requirements for recording business transactions when you could simply type the totals into a report and send that to HMRC each quarter? The answer is simple. By making it law that businesses must keep records digitally and that they must digitally link to produce the quarterly reports, which in turn links with HMRC’s system, you remove or at least reduce room for error or deliberate meddling.Therefore, given that HMRC will only receive a summary of your digital records it doesn’t plan to do much with them. It says that it will not use the quarterly data alone as a reason to start a tax enquiry. However, this could change in the long term as HMRC develops MTD, perhaps requiring you to send not just a summary but the underlying data too. We can only wait and see.Key points
- MTD has three main elements: MTD for VAT (VATfV), MTD for business (MTDfB) and MTD for Individuals.
- Businesses must comply with MTDfV for VAT periods which began on 1 April 2019 or in some cases begin on 1 October 2019 or later, and MTDfB no earlier than April 2021.
- Records of all transactions must be recorded digitally. Compatible software will be required for this. Spreadsheets can be used to wholly or partly record and maintain digital records.
- Existing bookkeeping software will probably meet MTD standards.
- Additional software and added functionality to existing software will be required to send reports to HMRC.
- Accountants and bookkeepers will be able to submit MTD reports on your behalf, but might not be able to take over responsibility for recording transactions digitally. You should adapt your existing practices to meet MTD requirements.
About Oscar Fairchild: Oscar Fairchild (incorporating Redwood Clarke since 01.09.18) is an ACCA chartered and certified and AAT qualified accountancy, financial consultancy & bookkeeping practice with offices in The City of London, and Billericay, Essex. Offering a wide range of services including Self-Assessment Services, Annual Returns, VAT Returns, Credit Control, Payroll, Auto Enrolment Pension and Management Account services to high growth businesses and licensed London taxi drivers across London, Essex and Hertfordshire.