What is Making Tax Digital?

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

HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works – transforming tax administration so that it is:

  • more effective
  • more efficient
  • easier for taxpayers to get their tax right

This is a first-step towards a long-term goal of requiring real time filing of individual transactions with HMRC.  On 1 April 2019, the rules take effect only for VAT. Following this, MTD may be extended for Income Tax and Corporation Tax, from 2020 at the earliest.

Making Tax Digital for VAT timeline

April 2019Making Tax Digital mandated for all customers (except those that have been deferred).
October 2019Making 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.

What are the requirements?

Businesses must use “functional compatible software” to submit digital information to HMRC. In simple terms this means some form of computerised bookkeeping software or cloud accounting package must be used to connect to HMRC to submit information to them. HMRC have advised that the use of spreadsheets will be permitted although they will need to be combined with third-party commercial software, using APIs, (Application Programming Interface) to ensure a seamless flow of data from the business to HMRC (and vice versa).

As a business owner, what should I do?

It is important that you keep your accounting records up to date, particularly as a VAT registered business.

For each supply you make you must record the:

  • time of supply (tax point)
  • value of the supply (net value excluding VAT)
  • rate of VAT charged

This only includes supplies recorded as part of your VAT Return. Supplies that do not go on the VAT Return do not need to be recorded in functional compatible software. For example, intra-group supplies for a VAT group are not covered by these rules.

The time of supply is the date that you must declare output tax on. Typically, this is when you send a VAT invoice or, if you are on cash accounting, when you receive payment for the supply.

Action required

As April 2019 is drawing closer, businesses should start thinking about how MTD will affect them.  This includes:

  • Ensuring the accounting records are fit for purpose and are MTD-compliant
  • Considering the robustness of the VAT policies and practices that will form the back-bone of the digital records.

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