HMRC has been talking about a ‘digital by default’ approach to managing VAT, Corporation Tax, and other business taxes for some time. The project, however, has not run smoothly, and delays have already cost the government a small fortune.
Known as the Making Tax Digital (MTD) project, HMRC wants all businesses - working with accountants/agents - to update accounts more often using compatible software.
Despite concerns, most recently voiced by the British Chambers of Commerce (BCC), HMRC seems keen to push forward with making the mandatory MTD VAT service from 1 April 2019. MTD for VAT has already been trialed amongst hundreds of businesses, with more being invited to join soon.
Mandatory from April 2019
For businesses already above the VAT registration threshold of £85,000, this means now is the time to get ready. For those below that threshold, you don't need to adopt the MTD approach, but you can do so voluntarily to ensure you are ready when it becomes mandatory for every applicable tax.
According to VAT Notice 700/22, published on 13 July 2018, exemptions are only in place for those going through insolvency, if it isn’t practical to use digital tools (e.g. age, remote location, disability, etc.), or your business is “run entirely by practising members of a religious society whose beliefs are incompatible with the requirements of the regulations.”
Apart from those exemptions, this new way of updating HMRC is coming soon to every business.
Once you are ready to switch over to MTD, “You must tell HMRC in writing if you want to join or leave Making Tax Digital.” HMRC, either directly or through your agent/accountant will ensure the software being used is compatible with MTD systems, and then from the next VAT tax period onwards, VAT returns will be submitted electronically.
Selecting the right software
Depending on the software used, you may not need to keep physical records of invoices. If invoices received and sent can be scanned or uploaded to the software, and then transmitted to HMRC as needed, then you won’t need to keep paper records of every invoice.
When selecting software, or making sure the software already being used is compatible, HMRC advises to check it can do the following:
- record and preserve digital records
- provide to HMRC information and returns from data held in those digital records by using the API platform
- receive information from HMRC via the API platform
Equally important, under these new guidelines, are digital links.
Can your software create digital links?
According to the guidelines, this means: “transferring data manually within or between different parts of a set of software programs, products or applications that make up functional compatible software is not acceptable under Making Tax Digital.”
For example, if you've got a cell in the software documenting an invoice paid, that should link to the original invoice.
Digital links include the following:
- emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation)
- transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to an agent to import that data into their software
- XML, CSV import and export, and download and upload of files
- automated data transfer
- API transfer
This list is not exhaustive.
For the first year of MTD, “(VAT periods commencing between 1 April 2019 and 31 March 2020) businesses will not be required to have digital links between software programs.” After that, it is mandatory to make sure the links within software are functioning.
Alongside our software partners, we are committed to supporting businesses throughout the MTD transition. Contact us today to see how we can help get you ready for making tax digital.
Disclaimer: We hope you found the information in this article useful and informative. Please remember that this is an article and is no substitute for professional advice on taxes, your business or personal finances.