Making Tax Digital - Are you ready?

The changes have already begun. Digital tax accounts for individuals have been created by HMRC. Meanwhile, businesses should be preparing for the introduction of “MTD for VAT” which becomes mandatory with effect from 1 April 2019. There have already been several postponements to the original timescales for the introduction of MTD and it wasn’t until July this year that HMRC published their detailed guidance on MTD for VAT (in the form of VAT Notice 700/22). The rest of this article will focus on MTD for VAT because this is where urgent action is needed by affected businesses within a relatively short timescale to ensure that they are prepared for the changes. All other taxpayers should be aware that HMRC plan to extend MTD to other taxes including Income Tax and Corporation Tax, perhaps as early as April 2020.

Making tax digital for VAT

The first group of taxpayers to face mandatory MTD requirements will be VAT registered businesses with an annual taxable turnover above the registration threshold of £85,000. The requirements will remain in place even if such businesses subsequently fall below the threshold, unless they completely deregister from VAT.

Many businesses will already be used to filing their VAT return online through HMRC’s gateway, but under MTD for VAT, this in isolation will no longer be an option and the new requirements represent a major change. From 1 April 2019, affected businesses will have to keep digital records for VAT purposes and file their VAT returns digitally using MTD compatible software. This software must be capable of recording and preserving records in a digital form, sending VAT returns and information to HMRC directly from the software, and receiving information from HMRC. The major accounting software providers are developing or upgrading their products so that they will enable users to meet the record keeping and filing requirements.

How to prepare for MTD for VAT

The changes are so fundamental that those businesses affected will need to review their record keeping systems and plan ahead to make sure that they have a software solution that will comply with the new MTD requirements in time.

 Businesses that currently keep their accounting records on accounting software should review their software to ensure that it is compatible. Sufficient time should be allowed to upgrade or replace this software if necessary.

Many businesses will currently be using spreadsheets as part of their VAT records. Under the proposals, spreadsheets alone will not satisfy the MTD requirements. There will need to be a digital link from the spreadsheet to HMRC’s systems in order to submit the VAT return data directly to HMRC, which could be challenging. Such businesses may prefer to take the opportunity to move onto an accounting software package. A lot of software providers now offer “cloud-based” systems, which means that the data can generally be accessed from any device with an internet connection. This can increase efficiency, and it also enables the data to be shared within the organisation and with accountants, bookkeepers etc.

 Businesses who maintain their accounting records manually, such as using cashbooks etc., will need to decide whether they can implement compatible software or consider what additional support they will need. They will need to think about whether they have the necessary time, resources, inclination and expertise to process the accounting transactions digitally by themselves. They may wish to engage the services of a bookkeeper to maintain their accounting records using MTD compliant software, or of course seek assistance from their accountant.

Businesses that currently engage their accountant or bookkeeper to prepare and submit their VAT returns to HMRC should check with them that they are prepared for the changes. They may find that their accountant will recommend changes to the format in which information is supplied to promote efficiency with the new system.

Affected businesses may want to start implementing their procedures for MTD for VAT as soon as possible in order to trial their new systems and to make sure that they are compliant before it becomes compulsory