What is Making Tax Digital and how does it affect me?

Making Tax Digital

What is Making Tax Digital for VAT?

Making Tax Digital (MTD) for VAT is the latest regulation introduced by H M Revenue & Customs to make it easier for businesses to get their taxes right and to manage their affairs. H M Revenue & Customs have ambitions of becoming one of the most digitally advanced tax administrations in the world and this follows the phased introduction of Real Time Information (RTI) for Pay As You Earn (PAYE) in April 2012.

Making Tax Digital will require business to keep digital business records and use those records to prepare their VAT Returns and communicate with H M Revenue & Customs digitally via their Application Programming Interface (API) platform.

When will Making Tax Digital come into force?

For applicable businesses, Making Tax Digital will come into force on 1 April 2019 and will incorporate VAT Return periods beginning on or after this date.

Does every business have to follow the Making Tax Digital rules?

You must follow the Making Tax Digital rules if your turnover exceeds the VAT registration threshold (currently £85,000) unless you are exempt due to the following:

  • Your business is run entirely by practising members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers).
  • It is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason.
  • You are subject to an insolvency procedure.

Businesses with a turnover below the VAT registration threshold will not be asked to keep digital records until at least 2020.

If you are exempt from Making Tax Digital, you can voluntarily choose to follow the rules.

Digital record keeping

Many businesses will already be keeping digital records using modern accountancy and bookkeeping software. With the introduction of Making Tax Digital you should ensure your software is compatible with the new requirements by contacting your software provider.

If you are currently keeping manual records and you are required to follow the Making Tax Digital rules, then you will need to change you bookkeeping practices. If you are currently using a spreadsheet system for recording your business records, you will need in implement a bridging software to connect your current records to the API platform of H M Revenue & Customs.

Currently all VAT registered businesses must keep and preserve specific records. With Making Tax Digital certain, but not all, records must be kept digitally within compatible software. There will still be a requirement to keep certain records in their original form such as import VAT certificates.

The following records must be kept, maintained and preserved in a digital form:

General Records

  • Your business name.
  • The address of your principal place of business.
  • Your VAT registration number.
  • Any VAT accounting schemes that you use.

Income Records

  • Time of supply (tax point).
  • Value of the supply (net value excluding VAT).
  • Rate of VAT charged.

Expenditure Records

  • Time of supply (tax point).
  • Value of the supply.
  • Amount of input tax that you will claim.

VAT Records

  • The total output tax you owe on sales.
  • The total tax you owe on acquisitions from other EU member states.
  • The total tax you are required to pay on behalf of your supplier under a reverse charge procedure.
  • The total input tax you are entitled to claim on business purchases.
  • The total input tax allowable on acquisitions from other EU member states.
  • The total tax that needs to be paid or you are entitled to reclaim following a correction or error adjustment.
  • Any other adjustment allowed or required by VAT rules.

Other information to be provided using Making Tax revenue Digital

In the future voluntary VAT updates will be a feature of Making Tax Digital. This will allow businesses to provide VAT information to H M Revenue & Customs outside of a VAT Return.

Supplementary data will also be a feature of Making Tax Digital in the future and will also be provided on a voluntary basis. This will be additional information to support the current 9 VAT boxes and will enable H M Revenue & Customs to ensure your VAT Return is correct.

Agent authorisation

If you use an agent to assist with your VAT Returns you can authorise them to send and receive information from H M Revenue & Customs. Unlike the current authorisation system, you can authorise multiple agents and manage different levels of permission for each agent.

Further details and questions

If you require further details, they can be found in VAT Notice 700/22: Making Tax Digital for VAT. Please contact us if you have any questions and we will be happy to help.

Final thoughts from Rob Pyke, Director of R & J Business Solutions

I will admit to being sceptical at first with regards to Making Tax Digital and curious as to what information businesses would be required to send to H M Revenue & Customs on a regular basis and were we being driven deeper into a “Big Brother” culture. I was also concerned with the additional administration burden on small business and the financial implication of the changes. With regards to our clients that have already embraced technology the implementation of Making Tax Digital appears relatively straight forward but for our clients that still keep manual records there will be additional costs of purchasing the software and training or engaging a bookkeeper to record their business transactions for them. For smaller businesses who will be asked to keep digital records after 2020 the administrative and financial burden will be far greater in comparison to the size of their businesses.

H M Revenue & Customs have stated that the purpose of Making Tax Digital is to make it easier for businesses to get their taxes right and to manage their affairs. I do fail to see how this is to be achieved when the information submitted is the same as under the current regime. I do think the introduction of software into record keeping is a good thing however the end result (the VAT Return) will only be as accurate as the initial input into the software. A business that resists the change and refuses adequate training and support will certainly end up with incorrect returns.

The introduction of Real Time Information almost 7 year ago has created problems. This is an automated, digital system the same as Making Tax Digital and when it works it is fine. When there is an issue the problems escalate. We have found on numerous occasions that businesses are chased for taxation liabilities that do not exist. When H M Revenue & Customs are contacted about this, they are unable to overwrite the system and there is no common-sense approach, and this can lead to unnecessary distress and additional work for both agents and clients. The problems appear to be less frequent now, but I do hope H M Revenue & Customs do allow for manual intervention in their Making Tax Digital systems.

Despite my concerns I do think we should all be embracing modern technology and systems and if implemented correctly they will help businesses in the UK.

As a QuickBooks Platinum ProAdvisor we are recommending our clients without Making Tax Digital compatible software move to the QuickBooks online and we are happy to offer the software at a discount. If you would like any advice on Making Tax Digital, please contact us and we will be happy to help.