Why are we making tax digital?
Her Majesty’s Revenue and Customs (HMRC) proposes to move to a fully digital based tax system.
By the end of the 2020/21 tax year the way that businesses, including landlords, currently interact and liaise with HMRC will change beyond all recognition. This initiative is known as “Making Tax Digital” (or MTD).
Under current proposals the introduction of MTD will be phased in, as follows:
MTD for VAT
From April 2019 all VAT registered businesses with turnover above the VAT threshold will be required to maintain digital records and will need to send their VAT information to HMRC using third-party commercial software. HMRC’s online portal will remain available to all other businesses that complete a VAT return but have turnover below the VAT threshold.
At this time we understand there will be no free software for MTD for VAT. Commercial software must be able to:
- Keep & preserve records in a digital form
- Create a VAT return from the digital records
- Provide HMRC with VAT data on a voluntary basis
- Receive information from HMRC via the API (application programme interfaces) platform – This will allow HMRC to send ‘nudges’ to the business/agent.
MTD for Business (MTDfB – Income & Corporation Tax)
Under the original timetable, MTDfB obligations were to start with effect from the first accounting period beginning after 5 April 2018. The legislation is now drafted in such a way that the obligations are likely to begin with effect from the first accounting periods beginning after 5 April of the relevant tax year that MTDfB is introduced (2020 at the earliest).
MTDfB is about digital record keeping and making quarterly tax submissions to HMRC direct from accounting software. One month will be allowed to make each quarterly update; for smallest business, this is a three-line account (income, expenses and profit). Updates will be made directly from the accounting software to a digital tax account. There is likely to be a voluntary pay as you go option – based on the forecast tax liability in your digital tax account.
Nine months are likely to be permitted for year-end finalisation – the ‘quarter five’. HMRC envisages taxpayers submitting their own quarterly updates and agents making the final year-end update – the fifth return.
A new points based penalty system is being proposed for all late returns across Income Tax, VAT and Corporation Tax (like a driving licence – with a bad mark per return, and a financial penalty after set number of missed submission).
If you would like us to help you prepare for Making Tax Digital and assist with the transition to an online accounting platform then please do not hesitate to contact us.