Making Tax Digital (MTD) Explained
This article is to help you understand MTD and what you may, or may not need to do. There is quite a lot of information to take in, but with a change this big we need to be as comprehensive as possible. So, please read through and don’t be shy about contacting us with any questions.
What is MTD?
The Government have brought in an initiative to transform the tax system. The aim is to make the tax system more efficient, effective and easier for taxpayers to calculate their tax, through a fully digitalised system.
In practice, this means:
- Keeping digital records
- Submitting returns to HMRC via MTD compatible software
Who does it apply to?
Initially, MTD applies to businesses with a turnover above the VAT threshold of £85,000. Businesses with a lower turnover will not be required to use the system, although they can choose to do so voluntarily, if they wish. In time, the system will apply to most businesses, self-employed, landlords and individual tax payers, however the initial roll out of the scheme is aimed at VAT registered businesses only, who are over VAT threshold.
When will the changes take effect?
From April 2019 businesses will be required to use ‘Making Tax Digital for Business’ compatible software, initially to meet VAT obligations. This will take effect on the first VAT return start date, after the first of April 2019. For example, if your VAT quarter starts on the first of May, then MTD will apply on the first of May, for the May, June and July VAT quarter.
The first MTD submission through the MTD compatible software for the VAT period starting the first of May will need to be submitted by the seventh of September.
How do I prepare for Making Tax Digital?
If you are an Equation client, then you don’t need to worry. We are ‘Making Tax Digital Ready’ and have been working away behind the scenes, setting up our MTD credentials and ensuring the software we use – Clearbooks and Xero, is compliant, ready for the switch over.
If you are a client who is over the £85,000 turnover threshold for the last twelve months, then we will be in touch with you over the next few weeks to ensure a smooth MTD transition. With your authority we will enrol you for Making Tax Digital with HMRC at the optimum time to ensure you are signed up well before the deadline.
So, what ‘exactly’ are the changes and how will I be affected?
Aside from registering for MTD, (which we will complete your behalf if you meet the criteria), the other points businesses need to consider for MTD and digital record keeping are:
- Ensuring your records are stored in electronic format, ideally on a cloud storage system.
- Ensuring your VAT records are entered and submitted via a digital accounting programme.
- Keeping a digital record of your business name, principle place of business and VAT registration number (including the VAT accounting scheme used by the business). These details are on your VAT Certificate, except for VAT scheme, which will be provided.
- Retaining details about supplies made and received.
Details about supplies made and received include:
- the time of the supply
- the value of the supply
- the rate of VAT charged
In addition, the VAT account within the MTD compatible accounting software needs to show the audit trail link between the primary records and the VAT return and should include:
- the output tax on sales, the output tax due on acquisitions from other EU member states
- the tax payable on behalf of your supplier under a reverse charge procedure
- the tax that needs to be paid following a correction or error adjustment
- the input tax claimable from business purchases
- the input tax allowance on acquisitions from other EU member states
- the tax reclaimable following a correction or error adjustment
- any other necessary adjustments required by VAT rules
Xero and Clearbooks include these items in the VAT account and any VAT adjustments made are stored electronically.
What if I am already on a cloud-based accounting programme?
If you are already using a digital-based accounting programme such as Clearbooks or Xero to record your VAT transactions, then you may need to consider how you save and store your supporting primary records.
From April 2019, if you are registered for MTD, then all records need to be stored digitally, so that in the event of an inspection, they can be easily viewed. In addition, it can be demonstrated how the documents relate to the VAT return and the entries on the VAT audit trail within the MTD compatible software.
As a client of Equation, you have already chosen a proactive method of managing your records by electronically uploading them periodically to your cloud account, which means a great deal of the work for MTD has already been done. Aside from checking to ensure the necessary information is included in the supplies your business makes and receives, there is nothing further for MTD to be done, except to keep your digital records for up to six years.
However, if you are still working from paper, then now is the time to start uploading records digitally.
Simply good practice
From April 2019, you may wish to consider attaching the primary record to the relevant transaction within the accounting software programme when you enter the data. This will give easy viewing of the record the entry relates to. Some programmes do this automatically, whilst others use the ‘paperclip’ icon button to browse and attach the relevant document from within your files.
If you choose to do this, you will need to adopt the habit of scanning or saving one invoice or receipt per PDF. This may mean you start scanning, photographing or saving your receipts and bills individually, rather than as a stream, so they can be attached to individual transactions within the programme.
Making Filing Effortless
‘Hubdoc’ is a genius programme which ‘fetches’ invoices via your online accounts and drops them neatly into Dropbox while you sleep. This is a truly effortless way of retrieving and filing your records, which you can read more about here. We absolutely love it!
Do I ‘really’ have to comply with MTD?
Yes. The new rules apply to everyone above the threshold except in some very exceptional circumstances, such as on the grounds of religious beliefs or lack of internet connection due to remoteness of location. There may be penalties applied for those who do not comply.
There is a clause in the regulations that a transaction does not need to be recorded digitally if this would be “impossible, impractical or unduly onerous” however how that would be interpreted, and it would be proved is entirely another matter.
What if I am still using paper and spreadsheets?
If you are over the threshold and don’t currently use a digital or cloud-based programme to record your VAT entries, then you need to start preparing for MTD now to ensure you make the switch before April. Please contact us so we can help you through the transition. We have lots of practical tools and tips and would be very happy to help.
Start getting into the habit of using your smart phone to take photos of receipts and uploading them to a secure online cloud storage area, buy a scanner, or sign up for an invoice retrieval programme, such as ‘Hubdoc’.
What if I have lots of paper bills and receipts?
If you have a lot of paper bills and invoices it is also time to start writing to your suppliers and asking for digital copies of primary records to be emailed, rather than receiving paper invoices.
What if I am below the threshold?
There is no mandatory requirement for MTD if you are below the threshold, but it is a good idea to monitor your turnover on a rolling twelve-month basis. If you are getting near the threshold you will need to apply for VAT / MTD registration within a thirty-day period of crossing over.
Will HMRC now receive details of every transaction?
No, this is a myth. HMRC will still only see the VAT return totals figures as they do now, however the requirement is to record each individual transaction digitally. In the event of an inspection, a request will be made to see the download of the digital accounting records and there will be penalties for those not keeping the required records digitally.
So, what’s the bottom line?
Ultimately, if you are already using a cloud accounting programme for VAT and storing your records electronically then you will experience very little difference in the new MTD system to how you are currently working. This is because you have already chosen a proactive method to manage your accounts; by uploading and submitting your records electronically to Equation monthly, a great deal of the work has already been done, so you can relax from ‘MTD mania’ and continue as you are.