There is little doubt that the UK Government’s ‘Making Tax Digital’ programme is a bold one. In their words, “HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world”. So, what is making tax digital, and what are the benefits?
As the name suggests, Making Tax Digital (MTD) is the HMRC programme of work to switch from a reliance on traditional paper-based systems and forms for tax administration, to a digital tax platform. MTD has already been rolled out for UK VAT, and will eventually be used for income tax, company tax, and self-employment tax.
MTD for VAT went live in April 2019 for those businesses over the £85,000 VAT threshold. According to HMRC, as of 9th March 2020, more than 1.4m businesses have joined the new digital VAT service, and over four million VAT returns have been successfully submitted.
While the way in which taxes will be filed will change, the tax rules which apply are not changing as part of MTD.
MTD is intended to make filing tax easier for businesses by mandating businesses to use MTD compatible record-keeping software and tools which can automatically prepare tax returns and send them directly to HMRC. This avoids the complexity and time-consuming process of entering VAT returns manually.
There are several benefits of HMRC’s MTD, including:
Increased business productivity – according to the Lloyds Bank UK Consumer Digital Index 2019, going digital could save one day per week of business administration
Reduced stress and worry when it comes to filing tax returns
Greater accuracy and fewer errors when submitting tax returns
Improving visibility of tax liabilities (i.e. real-time tax information is available)
Ability to redirect staff to other business activities
Ability to see tax data on mobile devices
At present, only VAT registered businesses with a taxable turnover of £85,000 or more, must follow the rules for MDT for VAT. VAT registered businesses with lower turnovers can use the MDT scheme on a voluntary basis. VAT returns are made each quarter electronically.
Businesses planning to use MDT for VAT require suitable software – a wide range of options are available depending on whether the software is for use by a business or an agent, whether it needs to manage all aspects of record-keeping for VAT, or whether it just needs to bridge between existing software and the HMRC’s MTD systems. Solutions may incur a one-off cost, monthly cost, or maybe free.
HMRC requires that businesses store and maintain the following VAT-related data:
Business name and details
VAT number and details of any schemes used
VAT on supplies made and received
Adjustments to returns
Time of supply (tax point)
Rate of VAT charged on supplies made
Reverse charge transactions - if your software does not record them, you need to record them Twice as a supply made and a supply received
Daily gross takings (DGT) if you use a retail scheme
Purchases of assets you can reclaim tax on if you use the Flat Rate Scheme
Value of sales made and total output tax on purchases under Gold Accounting Scheme (if applicable)
Documents that cover multiple supplies made or received on behalf of your business by:
Volunteers for charity fundraising
A third party business
Employees for business expenses in petty cash
As we have already established, there are potential cost savings associated with MDT due to the reduced amount of time required to prepare manual tax returns. However, on the other side of the balance sheet (so to speak), there are some additional costs which MDT may impose on businesses, including the cost of compatible software for record-keeping and data transfer.
Many established cloud-based accounting software systems, including Quickbooks, Xero, Sage, and FreeAgent, charge a monthly fee, depending on the number of users required. Typical fees range between £30 and £50 per month. There are also cheaper options which take data entered into a spreadsheet and send it to the HMRC.
In 2021, it is expected that HMRC will put in place MDT for income and corporation tax. It may also be rolled out to all VAT-registered businesses. While no formal announcement has been made, it is expected that the first tax year to go digital for income tax will be 2021/2022. It is reasonable to suspect this may be delayed as a result of Coronavirus, which is leading to considerable delays in projects across many sectors, due in part to re-prioritisation of resources.
The MDT for VAT roll-out appears to have proceeded reasonably smoothly so far. As the HMRC have confirmed, over 83% of affected businesses have signed up, 95% of which successfully made their first return through the service on time. There have been problems encountered by tax agents, some of whom have been unable to set up their Agent Services Account (ASA) and, hence, act on behalf of their clients in relation to MTD submissions. HMRC is currently working to resolve any outstanding problems relating to ASAs.
The digitisation of the UK tax system is a win-win for all concerned. It is allowing businesses across the length and breadth of the country to divert resources which were traditionally focused on preparing tax returns, to other functions. While most businesses will not be too concerned about the benefits for HMRC, for them it will mean greater visibility of projected tax revenue, and it allows data for businesses to be instantly available to all of their departments and offices. As such, businesses requiring assistance and guidance with their tax matters should, in theory, be able to access timely and relevant information from HMRC who can view their real-time tax records immediately. Anyone who has ever spent far too long on the phone to a tax office while they find your records will know, this is not an inconsiderable benefit.
HMRC’s Making Tax Digital for Business will bring a big change to the way businesses all over the UK manage their tax accounts. To ensure you or your business is compliant with the new rules you need to start preparing now.
Our team of tax accountants can get up to speed on Making Tax Digital, and just as importantly, ensure you avoid any fines when the deadline hits. Get in touch with us here, or try our instant accounting quote tool and one of our accountants will be in touch shortly.