Since it was first mentioned way back in 2015, Making Tax Digital has undergone a number of changes, delays and deferrals. So, where are we now?
The first thing to note is that you are only affected by Making Tax Digital (MTD) now if you are (or are about to become) VAT registered.
Am I within Making Tax Digital?
At the moment, you only have to follow the MTD rules if your annual VATable turnover is above the VAT registration threshold of £85,000.
Once you have exceeded the threshold, the MTD rules will apply from the start of your first VAT quarter which begins on or after 1 April 2019.
If you have registered for VAT voluntarily and your turnover remains below the threshold you are exempt from MTD, although you can choose to sign up.
Once you have signed up for MTD you cannot opt out again unless you deregister from VAT.
What is Making Tax Digital?
Before MTD was introduced, businesses were required to keep certain records to comply with VAT legislation but there was no requirement to keep these in a digital format.
VAT Returns were submitted to HMRC on paper, or using HMRC’s online service to key the relevant information directly into the VAT Return boxes. Businesses that are not within MTD can continue to do this.
Under MTD, there are two main requirements:
– Records must be kept digitally, using ‘functionally compatible software’
– VAT Returns must be submitted to HMRC using that software: HMRC’s online service is no longer available
What records must be kept digitally?
For sales and supplies, you must keep a line by line record for each transaction of:
– The taxpoint or date of the supply
– The net (before VAT) value of the supply
– The rate of VAT charged
For purchases and expenses, you must keep a line by line record for each transaction of:
– The taxpoint
– The net value of the supply
– The amount of input VAT that you can reclaim
Some information about your business must also be kept digitally:
– Your business name
– The address of the principal place of business
– Your VAT registration number
– Any VAT accounting schemes that you use such as flat-rate schemes, retail schemes, margin schemes and so on.
If you are using compatible software, all this should be taken care of for you by normal data entry processes.
What is ‘functionally compatible software’?
Your software must be capable of connecting to HMRC directly via an Application Programming Interface (API).
The vast majority of software packages will have this capability. HMRC do have a list of compatible software providers on their website here.
This includes all the well-known companies such as Xero, Quickbooks and FreeAgent and many, many others.
Can I use spreadsheets?
Yes you can!
Spreadsheets can be used to keep your digital records, but they must be capable of calculating the VAT Return entries directly, without any need to copy and paste or manually re-enter any numbers.
You will also have to use bridging software to link your spreadsheet to HMRC and extract the required VAT Return information directly from the spreadsheet.
If you use spreadsheets in your business you will need to make sure:
– All information that is required to be kept digitally is held within the spreadsheets
– You have working formulas within the spreadsheets to calculate your VAT Return box entries
– You have bridging software which will submit these VAT Return box entries to HMRC directly, without using copy-and-paste or manual re-entry of any figures.
If you have any concerns about spreadsheet compliance or bridging software please get in touch.
Are more changes coming?
We know from previous announcements that ultimately the government and HMRC aim to require more business to use digital record keeping so it seems highly likely that MTD entry rules will change going forwards.
More specifically, it was announced in the Spring Budget of 3 March 2021 that all VAT registered businesses and landlords, regardless of turnover, will be required to comply with MTD requirements from 1 April 2022.
This means that if you are VAT registered but below the registration threshold you need to start thinking about MTD now. If you are not currently using digital record-keeping you will need to get ready to start; if you are using digital record-keeping via software or spreadsheets you will need to make sure they are MTD compatible.
In addition, there will be a requirement for all businesses and landlords with a turnover above £10,000 to electronically file quarterly results with HMRC to comply with Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) from April 2023. This is regardless of the VAT Registration status of the business.
HMRC have confirmed that there will be no mandatory Making Tax Digital for Corporation Tax (MTD for CT) until at least April 2026.
If you have any questions or concerns or would like to talk about how MTD will affect your business please contact me. I’m happy to help and initial consultations are free of charge.
