Making Tax Digital is on the horizon

Making Tax Digital (MTD) is an HMRC initiative that will revolutionise the UK tax system and ultimately bring an end to self-assessment.

The primary aim of Making Tax Digital is to make tax administration more effective, efficient, and easier for taxpayers through the implementation of a fully digitalised tax system by 2020, whilst also reducing HMRC’s overheads for managing tax affairs.

The changes apply to a wide range of taxpayers, including most businesses, self-employed professionals, and landlords. This ‘new and improved’ tax system will require the majority of business owners to maintain digital records using compatible software

Originally announced in the spring 2015 Budget, the MTD initiative will modernise the UK tax compliance processes by adopting Digital Record Keeping for affected businesses, more frequent updating of compliance data, and making better use of third-party information.

What is a digital tax account?

HMRC is replacing tax returns with digital tax accounts for millions of businesses and individuals. A digital tax account brings together each taxpayer’s details in one place, just like an online bank account. Taxpayers will be able to view their tax affairs in real time, update their information, register for new services, see at-a-glance how their tax is calculated, and choose payment options.

What is the timeline for Making Tax Digital?

This is the latest Making Tax Digital timeline, announced by HMRC on 13 July 2017:

From April 2019, quarterly reporting is:

• Mandatory for VAT for all VAT-registered businesses with a turnover above the VAT registration threshold (£85,000)• Optional for VAT-registered businesses with a turnover below the VAT registration threshold (£85,000)

From April 2020 (at the earliest), quarterly reporting is:

• Mandatory for income tax and corporate tax (as appropriate) for all businesses (including landlords) with a turnover over the VAT registration threshold (£85,000)
• Optional for businesses (including landlords) with a turnover below the VAT registration threshold (£85,000)

What about ‘Digital Record Keeping’?

Only those businesses with an obligation to file quarterly (VAT-registered businesses with a turnover over the threshold) are obliged to keep digital records. For all other businesses, this becomes optional.

What does quarterly reporting mean for VAT-registered businesses?

It should be noted that the vast majority of VAT-registered businesses already report quarterly for VAT today, and so, other than a technical change in April 2019 to the actual method or reporting, the data reported, and frequency of report is unlikely to change for most businesses.

What is the timeline for MTD for VAT?

From April 2019 all VAT registered businesses over £85K turnover must comply with MTD requirements.

This means 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.

If your VAT return period is Feb-April or Mar-May, then the first VAT return periods subject to MTD will be May-Jul and Jun-Aug respectively.

What is a “digital” record?

Digital records mean records that are captured and held in an electronic/digital format and can viewed on a computer, whether a desktop, laptop, tablet or mobile phone. This could include:

• an entry into and accounting system or other software solution or app.
• a digital image/copy of a paper record (such as a photo, legibly showing all the necessary details, taken on a camera phone close to the point of the transaction)

The record itself must include, as a minimum, the date, amount and category of each business transaction.

Further details are contained in regulations (The Value Added Tax (Amendment) Regulations 2018 (2018/261)) and VAT Notice, which is now available.

What is a “digital” link?

HMRC defines this as a data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create the digital journey.

A digital link is an electronic or digital transfer or exchange of data between software programs, products or applications. The use of ‘cut and paste’ does not constitute a digital link.

How do we digitally link source data for a VAT group where each member entity has different source systems?

It is widely recognised that a VAT Group return is generally consolidated from several sources of data, MTD is not regulating the internal processes of how this is achieved. The flow of data being processed when arriving at the consolidated return however should be digital, notwithstanding any adjustments.

Does the software used to digitally send the VAT return have to be HMRC approved?

HMRC is currently working with vendors like Thomson Reuters to test various software solutions to send the VAT digitally through their API. HMRC provides each software system with a unique reference so when that system links to HMRC’s API in the future it will be authenticated. Make sure that any software you are using for this purpose has been tested and the link to HMRC has been authenticated.

Will HMRC continue to provide a VAT solution for MTD?

To our knowledge, HMRC have no plans to provide a solution for submitting VAT updates for those businesses impacted by MTD for VAT.

Do accountants need VAT software for Making Tax Digital (MTD)?

The vast majority of accountants use HMRC’s gateway to make the submission for their small clients, which is a relatively simple submission process.

For more complex or larger clients, VAT submission is usually performed by a dedicated product, or from a bookkeeping product.

What is the timeline for MTD for Income Tax?

Originally planned with a start date of April 2018, in July 2017 the start date was deferred until April 2020, at the earliest.

Who is affected?

Ultimately, everyone. The HMRC plans to digitise the income tax system will impact all taxpayers.

However, the need to report income quarterly (which is just part of MTD for income tax) will not impact on everyone.

What income needs to be reported quarterly?

For individuals, trustees and executors, only trading and/or property income needs to be reported quarterly. There will be a threshold set, and so only those with trading and/or property income over the threshold will need to report quarterly. Initially, the threshold will be aligned with the VAT registration threshold (£85,000).

Are partnerships affected?

Yes, the same thresholds and requirement to submit quarterly information applies to partnerships. One important distinction is that a quarterly reporting for a partnership needs to include all income for the period, not just trading and/or property income.

I’ve heard mention of five or six submissions – is this correct?

For those with a requirement to report quarterly, yes. There is the need for four quarterly submissions, a fifth (annual) submission for each trade to confirm the annual figures, and then finally a six declaration to confirm all income for the tax year.

Do I still need to do a self-assessment tax return?

Once MTD for income tax is in full swing, no. The six submissions reference above will be in lieu of the annual tax return process.

For more information about your Making Tax Digital obligations, contact Avanti Group.