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What is Making Tax Digital for Business?

As explained in our other blog What is Making Tax Digital? this initiative from HMRC is designed to make sure the UK tax system is effective, efficient and easier for HMRC to administer. If you have not read it, that blog will provide some useful background before reading this blog on Making Tax Digital for business (MTDfb).

HMRC’s aim with MTDfb in particular is to use technology to speed up the collection information about the tax affairs of businesses. Rather than asking businesses to file returns annually, HMRC will ask them to submit tax information quarterly or even monthly (in the case of payroll data).

Two Types of Data

Once MTDfb takes full effect (which may take many years), businesses will have to upload two types of data:

  1. DATA ABOUT THEIR OWN AFFAIRS

All businesses will be issued with a Digital Tax Account (DTA) into which they will upload data relating to their own Income/Corporation Tax, VAT, Construction Industry Scheme (CIS), National Insurance (NI) and PAYE affairs. Their DTA will be used to calculate the amount of the relevant tax to be paid by the business.

  1. DATA ABOUT THE AFFAIRS OF OTHERS

All individuals will be issued with a DTA too and information will flow into their DTA’s from various sources (see our other blog entitled What is Making Tax Digital?). One of these sources will be employers.

So if a business is an employer, the business will need to make regular submissions to HMRC in respect of salaries paid and PAYE and NI deductions made – with the data from these submissions being sent to the DTAs of each individual employee.

The same will apply to a business who uses the services of sub-contractors. Regular submissions will need to be made by the business to HMRC in respect of payments made to sub-contractors and any CIS tax deducted – with the data from these submissions being sent to the DTAs of each individual sub-contractor.

What Taxes Are Involved?

Eventually it is intended that MTDfb will cover all of the following taxes:

  1. VAT
  2. Corporation Tax
  3. Income Tax (Sole traders and partnerships)
  4. National Insurance
  5. PAYE
  6. CIS tax

What is the Timeframe?

It has been decided that MTDfb will be introduced in stages.

This makes much sense.

To introduce it all in one go would be too much for HMRC to cope with and too much for the business community to cope with.

  • PHASE 1: From April 2019, businesses with a turnover in excess of the VAT registration threshold and who are VAT registered will be brought into the MTDfb regime but for their VAT affairs only
  • PHASE 2: Other components of MTDfb (for example corporation tax and income tax) have been placed on hold for introduction in April 2020 at the earliest. The timetable from April 2020 is not (at the time of writing) clear.

Phase 1 – VAT

Currently, business that are VAT registered and that have a turnover in excess of the VAT registration threshold must file their VAT returns quarterly.

Under MTDfb this will not change. The returns will still need to be filed quarterly.

However, the WAY in which these returns are filed will change as will the record keeping obligations placed on businesses.

Many businesses use third party bookkeeping software to file their VAT returns. Others, instead of filing via third party bookkeeping software, type their VAT return figures directly into HMRC’s online system.

When MTDfb goes live on 6th April 2019, three things will change.

  1. The technology through which HMRC will accept VAT submissions from third party software providers will change. This means that software providers need to update their systems to ensure they are using the new technology i.e. to ensure they are compatible.
  2. HMRC will no longer allow businesses to type the VAT return figures directly into HMRC’s online system. All businesses will be required to file their VAT returns from a compatible third party bookkeeping software.
  3. In order to ensure all affected businesses are able to meet their filing obligations on time, it will become LAW that businesses caught by MTDfb must keep their bookkeeping records in a digital format. This does not mean that you need to keep all of your invoices electronically. What it does mean, however, is that you cannot do your bookkeeping on paper or in a book. You must do your bookkeeping on a digital platform.

What is important is that when you switch to a digital platform, it is key that you choose one that is compatible with HMRC’s system. If your digital platform is not compatible you will not be able to file your VAT returns.

Please see more about this under “What Should I Do Now?” below.

Phase 2 – Other Taxes and Businesses

In phase two, other taxes and smaller businesses will be brought into the MTDfb fold.

In respect of Income Tax and Corporation Tax, for example, the intent is that businesses will make quarterly submissions to HMRC showing their profitability for that quarter. Come the end of the year, both HMRC and the business will then have an accurate picture of the tax position.

Given that such quarterly submissions will be required, you can start to see why it must become law for businesses to maintain their books on an appropriate digital platform. And in order to be able to file meaningful information, businesses will also need to make sure their books are accurate and up to date on at least a quarterly basis.

What Should I Do Now?

VAT REGISTERED WITH TURNOVER EXCEEDING THRESHOLD:

If your business is VAT registered and its turnover exceeds the VAT registration threshold, then you must take immediate steps to get ready for MTDfb.

  • By 1St April 2019 you MUST be fully up and running on a piece of compatible third party bookkeeping software. You must be keeping your books on that software for all transactions from 1st April so that you are not in breach of the laws requiring you to keep your books digitally.
  • You must be in a position to submit the VAT return for your first VAT quarter that commences after 1st April 2018 using your chosen compatible third party software.

To clarify the second bullet . . .

  • If your VAT period will end on 31.03.2019, the first VAT return you will need to file under MTDfb will be your VAT return for the period ending 30.06.2019.
  • If your VAT period will end on 30.04.2019, the first VAT return you will need to file under MTDfb will be your VAT return for the period ending 31.07.2019.
  • If your VAT period will end on 31.05.2019, the first VAT return you will need to file under MTDfb will be your VAT return for the period ending 31.08.2019.

Please feel free to get in touch with E. H. Taylors if you need advice on what you need to do to prepare for MTDfb.

E. H. Taylors

Accountants in Southend-on-Sea and Hadleigh

OTHER BUSINESSES:

If your business is either [1] not VAT registered; or [2] VAT registered but with a turnover below the VAT registration threshold, then you do not (at the time of writing) need to take any urgent action.

However our strong recommendation is that you do actually take action now to comply with MTDfb.

The reason for this is that the march of progress means the full implementation of MTD(fb) is inevitable. It will happen – and the sensible thing to do is to prepare for it early.

Therefore, it is our recommendation that all businesses migrate their books onto a compatible digital platform as soon as possible. Not only will this make it easier for you to maintain the records of the business, but it will mean your business is ready for MTDfb when the second phase comes along.

Please feel free to get in touch with E. H. Taylors if you need advice on what you need to do to prepare for MTDfb.

E. H. Taylors

Accountants in Southend and Hadleigh

Compatible Digital Platforms

When you are preparing for MTDfb you will obviously need to ensure that the software you choose to work with will be compatible with MTD.

Please refer to our separate blog entitled What Software Should I Use for MTDfb?

 

Written by Antony Holdsworth Bsc (Hons) FCMA

Owner of:

Antony J. Holdsworth & Co
E. H. Taylors – Southend Accountants
Clarence Trustees – Will Writers in Southend