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Making tax digital

An overview of HMRC’s fundamental changes to the way the tax system works

You may have seen the TV adverts involving Sanjeev Bhaskar (Quick Books) and Peter Jones (Sage), reminding us that “HMRC is changing how we do our taxes”. To be precise, what they mean is that if you are an affected business, the way you will need to file your VAT Returns in the very near future, or for some, now, is changing.

What is MTD and why is it happening?

Making Tax Digital or “MTD” for VAT, is the first stage in HMRC’s initiative to bring in a digital tax system, whereby online interaction will be the default.

In 2017, HMRC stated:

“The tax system should make it easier for businesses to get their tax right first time. The latest tax gap figures show that too many businesses are prone to making mistakes with over £8 billion a year in tax lost from avoidable taxpayer errors. This not only costs the public purse – it also causes businesses cost, uncertainty and worry when HMRC is forced to look into their affairs. Making Tax Digital will tackle these challenges”.

Does this affect you and what do you need to do?

You must keep digital VAT records from your first VAT Return period starting on or after 1 April 2019, if your business:

  • has a taxable turnover over £85,000; and
  • is not in the deferral group* or considered a large VAT trader **

So, unless you fall in the very small exemption list* or are considered a large VAT trader** (large VAT traders have until 1 October 2019 to start keeping their records digitally) you will, by now, be in a VAT quarter that may involve you needing to take immediate action.

How will you know when you need to act?

One of the current live VAT quarters listed below will apply to you:

  • 1 April 2019 to 30 June 2019 filing deadline 7 August. (“MTD Quarter 1”)
  • 1 May 2019 to 31 July 2019 filing deadline 7 September (“MTD Quarter 2”)
  • 1 June 2019 to 31 August 2019 filing deadline 7 October (“MTD Quarter 3”)

If your business falls within MTD Quarter 1, you will be amongst the first that need to register with HMRC, but before doing so you need to ensure that you have software that is compatible with Making Tax Digital for VAT.

There are compatible software packages that you can use for this purpose, for example Sage, QuickBooks and Xero. Alternatively, you can use bridging software to connect non-compatible software like Excel, to HMRC systems.

The VAT records you will need to keep remain the same as for any VAT business, but some of these will now need to be kept digitally.

You can use any digital product to keep your records. These digital records make up the VAT Return you will now need to submit using compatible software.

If your next VAT filing falls within MTD Quarter 1, you need to act now.

If your next VAT filing falls within MTD Quarter 2 or MTD Quarter 3 and provided you are not a monthly VAT filer or an exempted business, it is advisable to delay registration until after you have filed and paid your last VAT Return using the current system.

For example: A VAT registered business with a VAT quarter ending 31 May 2019 would normally have a filing deadline of 7 July 2019. Its next VAT quarter, after the quarter ending 31 May 2019, is 31 August 2019, as referred to above as MTD Quarter 3.

As stated, its normal filing deadline is the seventh of the month following the quarter end, in this instance, 7 July 2019. If the business pays its VAT by direct debit, the collection date will be three working days later, in this example, 10 July 2019.

Once the VAT quarter has been filed and the payment processed, the MTD registration process should be considered. As it takes a minimum of 72 hours to activate, it is not advisable to leave it to the last minute or, in this example, to 7 October 2019, which is the MTD filing deadline (see MTD Quarter 3 above). Instead, the business (in this example) should consider registering for MTD sometime after 10 July but well before the 7 October, provided the last return has been filed and the VAT has been paid.

Are there more changes on the horizon?

MTD for VAT is the first stage in HMRC’s plans to make filing taxes digital by default.

It is planned that this will be followed by MTD for income tax (for the self-employed and those with income from property) and MTD for corporation tax.

HMRC is currently running its transformation project around MTD for individuals, all of which focuses around the Personal Tax Account, with the Simpler Assessment and the end of the Self-Assessment Tax Return, as the belief is that the Individual Personal Tax Account will be populated as a result of all businesses having to file information on a quarterly basis.

This article is provided for general information only and is not intended to be nor should it be relied upon as legal, tax or accounting advice in relation to any particular matter. If you would like to discuss any aspect of it, or need assistance with filing your VAT Return or with MTD in general, please contact James Colclough at james.colclough@burlingtonstax.com.

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