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How will making tax digital affect your business?

First announced by the then chancellor, George Osborne, in March 2015 as a “revolutionary simplification of tax collection”, the Making Tax Digital initiative is intended by Her Majesty’s Revenue & Customs (HMRC) to transform the UK into one of the world’s most digitally advanced tax regimes.

According to HMRC, Making Tax Digital “is a key part of the government’s plans to make it easier for [UK] individuals and businesses to get their tax right and keep on top of their affairs.”

The new digital tax system, set to be introduced in April 2019, is likely to have a ripple effect across many businesses.However, coming so close to the UK’s scheduled departure from the European Union (EU) on March 29, it appears that many haven’t made preparations to meet the deadline.

It’s crucial firms prepare and adapt accordingly to avoid any bureaucratic complications. The government says the new digitised system will reduce tax errors and save taxpayers approximately £610 million in extra revenue in 2020-2021. 

Despite the number of benefits this system has to offer, there remains a fog of uncertainty as to how businesses can adapt and what obstacles may lie ahead. Below, we discuss some of the key points surrounding the new Making Tax Digital system (otherwise known as MTD). You’ll also find a special checklist to help you with a smooth transition. 

When Does Making Tax Digital for VAT Begin?

For businesses making annual taxable supplies of over £85,000, Making Tax Digital for VAT will be compulsory as of the 1st of April 2019. For ‘deferred businesses’ - which comprise approximately 3.5% of the total - the new digitised system will come into effect on the 1st October 2019. 

What are deferred businesses?

HMRC have stated that some types of business have a deferred Making Tax Digital for VAT start date of October 2019. The following criteria specify a deferred business for MTD for VAT:

  • firms that need to make payments on account
  • annual accounting scheme users
  • trusts
  • ‘not for profit organisations’ that are not set up as a company
  • local authorities 
  • public corporations 
  • VAT groups
  • VAT divisions
  • traders based overseas 
  • public sector entities that are required to provide additional information on their VAT return

How Exactly Will MTD for VAT Affect My Business?

If you own a VAT-registered business with a taxable income above the VAT tax threshold you'll need to do the following:

a.             Store VAT records digitally

b.             Send VAT returns using approved Making Tax Digital compatible software.

For more information on what documents need to be filed digitally, check the VAT Notice 700/22. Businesses must comply with the Making Tax Digital rules from the first VAT period that begins on or after the 1st April 2019. 

 Can My Business Still Use Spreadsheets for VAT Filing and Record Keeping?

There are a number of reasons why the use of spreadsheets will fall short of meeting MTD for VAT requirements. Opting to use a spreadsheet exposes businesses to the possibility of making easy mistakes and errors when documenting their finances. Accidentally changing the content on a spreadsheet through a typo or an incorrect formula will alter data and may lead to a penalty for incorrect payments. 

Fortunately, HMRC is offering a special 12-month long ‘soft landing’ period which will allow firms to copy and paste data from a spreadsheet to approved software. 

What Software Should I Use for Making Tax Digital for VAT?

HMRC states that special MTD software must be capable of:

  • recording and storing all VAT-related digital records
  • sending information and returns from data held in these digital records to HMRC
  • receiving information from HMRC.

The right software will be able to carry out all of these tasks without any effort.Businesses using more than one software application will need to ensure they are all digitally linked, as you cannot copy information manually from one system onto another. 

It is important to note that digital records used for Making Tax Digital for VAT do not need to be stored in a single program. However, it is mandatory for them to be stored digitally. It is acceptable to use more than one software package as long as one of them is able to record and store digital records for VAT purposes.

For more information on the new Making Tax Digital system and how to best prepare, click here.

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