in Sage August 14, 2018
Making Tax Digital (MTD) is the most fundamental change to the administration of the tax system for at least 20 years. This scheme will be gradually implemented over time with the first stage, "Making Tax Digital for VAT", being rolled out in April 2019 with other tax filing/ payments following in 2020 at the earliest. The essential elements of Making Tax Digital that all businesses need to know is that:
- Paper records will no longer be sufficient: It will become mandatory for almost all businesses (Self-employed, Partnerships and Limited companies) to use software or a spreadsheet to keep accounting records. Paper accounting will cease to meet the requirements of tax law.
- VAT records will be kept and preserved digitally: An electronic account which contains all VAT records, transactional data and any adjustment calculations is to be kept in a digital format with a digital link.
- All returns are to be made digitally: All VAT returns will be required to be sent through HMRC compliant accounting software, creating the digital link to the HMRC.
What is a "Digital Link"?
A digital link is a link between computers and software system which allows the transfer of data. In order to comply with MTD legislation, all software must be digitally linked to create a "digital journey" for your VAT payments. This link must exist between modules or software systems through digital or automated processes such as file sharing or integration.
What is MTD-compatible Software?
MTD or functional compatible software can be a single or a set of software systems/applications which must be able to:
- Record and preserve digital records.
- Provide information and VAT returns from data held in the digital records to the HMRC using an API (Application Programming Interface).
- Receive data and information from the HMRC via the API.
- The digitisation of the tax system is already widely recognised as millions of businesses are already banking, paying bills and interacting online. Digitising routine business tasks such as record keeping is the next step the HMRC has identified in digitising taxation and one that many businesses have already taken.
- Each year the HMRC estimates that avoidable taxpayer mistakes cost the Exchequer of over £8 billion. In 2014-15 alone over £3.5 billion of revenue was lost due to these mistakes. They argue that a modern tax system, based on digital technology, will make it easier for companies to get their tax right. This will aid businesses by reducing the cost, uncertainty and worry that they face when the HMRC is forced to intervene.
If you are a VAT registered business, from April 2019 you will be required to start keeping and preserving your VAT records digitally. Your returns will be required to be submitted digitally through MTD-compatible software thereafter and the current online VAT return will cease to be available to businesses.
Are there any Exemptions?
You will be exempt from Making Tax Digital if:
- Your business has never had a taxable turnover over the VAT threshold (£85,000).
- If your entire organisation is run by practising members of a religious society whose beliefs are incompatible with the requirements of the regulations.
- If it is not reasonably practicable to use digital tools for business records i.e. age, disability and remoteness of the location.
- You are subject to an insolvency procedure.
What do I need to do now?
With April 2019 rapidly approaching it is imperative that your business prepares for the changes ahead. Below we have outlined three questions that we recommend all business must ask themselves:
- Will your company seek to be given an exemption based on the above criteria?
- Do you have the required accounting software? If so, then do you have the correct version? To be HMRC compliant please consult with TMS to check if you will need to upgrade your accounting system
- How are your accounting processes likely to change?
If you have any further questions regarding Making Tax DIgital or would like to check if your Sage systems require an update to be compliant with the latest Making Tax Digital guidelines, please contact us at firstname.lastname@example.org.