Making Tax Digital: A Guide For Businesses & Professionals

Making Tax Digital: A Guide For Businesses & Professionals

The date set for Making Tax Digital (MTD) is fast approaching. Businesses all across the United Kingdom are now preparing themselves for the next major phase of the programme - for what is considered an initiative that will revolutionise the UK tax system.

If you’re familiar with the initiative, you’ve probably heard the growing calls for businesses and individuals to modernise their UK tax compliance processes. This means adopting digital record keeping for all those affected. If you’re only just hearing about making tax digital now, it’s now time to get switched on.

Just like the General Data Protection Regulation (GDPR), Making Tax Digital has its compliance deadlines. With the changes applying to a wide range of taxpayers, including most businesses and self-employed professionals, knowing how to plan for the initiative is a must!

So, how do you find out about Making Tax Digital and how can you begin to plan for digital record keeping? We present a Luminate Digital guide, packed with all the valuable information you need to know, all in one place.

What Is Making Tax Digital (MTD)?

Making tax Digital 2 - Luminate Digital

Making Tax Digital (MTD) is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. The aim of Making Tax Digital is to implement a fully digitalised tax system by 2020.

The government recognises that the majority of business want to get their tax right, however, figures show that too many otherwise compliant businesses find this hard. Over £8 billion a year in tax is lost from avoidable taxpayer errors.

The HMRC initiative is set to revolutionise the UK tax system and bring an end to self-assessment. Think of it as a more effective and efficient way to make administration easier for taxpayers. With a ‘new and improved’ tax system, the majority of business owners will now be required to keep digital records and submit VAT returns using compatible software.

Originally, Making Tax Digital was announced in the spring 2015 budget, setting out the vision to transform the tax system. As of late 2018, private testing for the programme commenced with partnerships and customers that trade with the EU. As we role further into 2019, Making Tax Digital will soon be mandated for all customers with fundamental changes in full effect by 2020.

What Is Digital Record Keeping?

Digital Record Keeping applies to businesses with taxable turnover above the VAT registration threshold (£85,000). Currently, businesses are required to keep evidence of transactions including cash taking records, receipts and invoices (Many businesses note that existing record-keeping impacts workloads due to the build-up of paperwork).

Under MTD, businesses and individual professionals will be able to link their client's records directly to their practice software using compatible tools making for an easier and more accurate digital record keeping process.

As a result, organisations transitioning to digital record keeping will save time from correcting avoidable errors while allowing more time to be spent on offering higher value to their clients.

The Important Details

Making Tax Digital for VAT

Make Note: VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are required to use the Making Tax Digital service to keep records digitally and use software to submit their VAT returns from 1st April 2019.

The April-June 2019 VAT return will be the first return required to be filed according to the new MTD regulations due in July/August 2019.

From 2020 or earlier, it will be mandatory for quarterly reporting of income tax and corporate tax for all businesses (including landlords) with a turnover over the VAT registration threshold (£85,000). Additionally, information can be provided voluntarily.

By 2020, the Making Tax Digital initiative will mean that businesses and individual taxpayers can access their own tax affairs online via digital tax accounts.

Who Can Use This Service?

If you are a sole trader, part of a VAT group, a partnership or currently submit the VAT return of a limited company, you can qualify for a pilot. Once you have signed up, you need to start using Making Tax Digital compatible software (Section on software found at the end).

You cannot take part in the pilot at the moment if you:

  • Are a trust
  • Are Part of a VAT Division
  • Are based overseas
  • Are a non-profit organisation that is not set up as a company
  • Submit annual returns
  • Make CAT payments on account

Who Is Affected?

Across the United Kingdom, ultimately, everyone is affected by Making Tax Digital. HMRC’s plan to digitise the income tax system will impact all taxpayers.

Making Tax Digital, regardless where your stand, is inevitable and will probably be more far-reaching than one can imagine.

Income Tax

Some businesses are already keeping digital records and providing updates to HMRC. If you’re a self-employed business or landlord you can voluntarily use software to keep business records digitally and send income tax updates instead of filing a Self Assessment tax return.

Are There Any Costs?

Businesses and Individual professionals should prepare to face additional one-off costs. These may include hardware and/or software, upgrades on and reviewing existing processes, training staff in MTD processes, plus any additional costs to facilitate the move to Making Tax Digital. HMRC consultations predicted that the costs would average about £280 per business in the year of transition

Potential Problems

Making Tax Digital is not overly complicated, but businesses may embrace some struggles along the way. Adapting to MTD for large-scale businesses could take a substantial amount of time considering new processes coming into play. As with the original MTD proposals, transitioning businesses from manual to digital records will be challenging. Business will need advice selecting appropriate software where applicable.

According to Accountingweb, 53% of the business said tax regulation and the amount of information required to support filings had also increased

Making Tax Digital is still expected to commence from 1st April 2019 for the majority of affected businesses, which is the same time the United Kingdom leave the EU.

Making Tax Digital Timeline

Making Tax Digital  - Luminate Digital3

Since its proposal in spring 2015, Making Tax Digital is now approaching its commencement to a fully digital tax system. The timeline below presents what has happened so far and what is to come for MTD.

Date: October 2018

Activity: Open to sole traders and companies (except those which are part of a VAT group or VAT Division) provided they are up to date with their VAT. Those Who trade in the EU, are based overseas, submit annually, make payments on account, use the VAT Flat Rate Scheme, and those newly registered for VAT that has not previously submitted a VAT return, are unable to join at this point. Those customers with a default surcharge within the last 24 months will be able to join the pilot by the end of October 2018.

Date: Late 2018.

Activity: Private testing begins with partnerships and those customers that trade with the EU.

Date: Late 2018/Early 2019.

Activity: Open to other sole traders and companies who are not up to date with their VAT, users of the Flat Rate Scheme and businesses newly registered for VAT that has not previously submitted a VAT return.

Date: Early 2019.

Activity: Open to partnerships and those customers that trade in the EU.

Date: Spring 2019.

Activity: Pilot open for Making Tax Digital Customers that have been deferred.

Date: April 2019.

Activity: Making Tax Digital mandated for all customers (except those that have been deferred).

Date: October 2019

Activity: Making Tax Digital mandated for customers that have been deferred. The 6-month deferral applies to customers who fall into one of the following categories: trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (Government departments, NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.

Timeline source: Gov.Uk

MTD Software: The Benefits

Digital Record Keeping: For businesses, the burden of administrative tasks can be shouldered by software, freeing up business owner’s time.

Client Collaboration: Keep in close contact with your clients. Available software will allow for seamless notifications while enhancing the experience of exchanging data and improving efficiency.

Process Management: For accountants, Making Tax Digital allows them to move into a more advisory role as they can access and visualise data in real time and advise clients on how to react to affect outcomes.

Making Tax Digital Software

HMRC has published a list of software developers who have gone through successful testing. The list includes developers that provide bridging software / API-enabled spreadsheets and allows you to digitally report VAT information to HMRC. Software Providers include:

The full list of software providers can be found on HMRC’s website here.

Final Thoughts

Like we witnessed with the General Data Protection Regulation, many businesses failed to become GDPR complaint by the deadline. Similar recurrences could happen with Making Tax Digital if businesses and individual professionals fail to meet the effects of MTD by 1st April 2019.

However, with strong word-of-mouth and knowledge on the digital circuit, the presence of Making Tax Digital is evident as many businesses are already planning and preparing for digitised records.

For any and more information, refer back to the blog post and follow the useful links to industry related information that can help you tackle Making Tax Digital.

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