Initially launched in April 2019 for VAT registered businesses with sales exceeding £85,000 but the government has recently announced the next phases of Making Tax Digital which will affect more and more individuals and businesses.
If you are not yet filing your VAT returns under Making Tax Digital or are self employed or a landlord then you may be affected over the next couple of years.
What is Making Tax Digital (MTD)?
Making Tax Digital is a government initiative to “make it easier for individuals and businesses to get their tax right and keep on top of their affairs”.
This initiative will be rolled out over a number of years and will eventually see every part of the tax system being processed and submitted online using digital records.
What does it mean by digital records?
HMRC have provided a list of the information required to be kept in a digital format for MTD for VAT purposes.
your business name, address and VAT registration number
any VAT accounting schemes you use
the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
any adjustments you make to a return
the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
the rate of VAT charged on goods and services you supply
reverse charge transactions - where you record the VAT on both the sale price and the purchase price of goods and services you buy
your total daily gross takings if you use a retail scheme
items you can reclaim VAT on if you use the Flat Rate Scheme
HMRC have not yet provided a detailed list like this for MTD for Income Tax but have said digital records are to be kept for all business income and expense.
MTD Phase 1: VAT registered businesses with taxable sales over £85,000
The first phase was introduced in April 2019 for VAT registered businesses with taxable sales over the VAT threshold (currently £85,000).
From this date those businesses were required to keep digital records and use software to submit their VAT returns.
This was a major change for VAT registered businesses as they needed to change the way they did their bookkeeping. This meant moving away from hand written cash books or VAT workings scribbled on the back of an old envelope.
Spreadsheets can still be used but you will need ‘bridging software’ to get the data in the right format which is required to submit the VAT returns to HMRC.
Many businesses submitting their VAT returns under MTD are now using MTD compatible accounting software such as Xero and Quickbooks Online.
If you are currently voluntarily VAT registered (taxable sales under £85,000) then you can still sign up to MTD. HMRC has always encouraged this in preparation for the next steps.
To sign up for MTD for VAT you just need to login to your HMRC online services account and register. The process is very quick and easy.
MTD Phase 2: ALL VAT registered businesses
From April 2022 it will be compulsory for ALL VAT registered businesses to be signed up and submitting VAT returns under MTD.
This means that those businesses not yet using MTD compatible software to submit their VAT returns will need to start doing so.
MTD Phase 3: Self-employed and landlords with income over £10,000
From April 2023 it will be compulsory for self employed businesses and landlords with income over £10,000 to follow MTD for Income Tax from your next accounting period starting on or after 6th April 2023.
This means that self employed individuals and landlords will need to be using MTD compatible software to keep your records.
The plan is that you will submit your information every 3 months to HMRC using the software. Then at the end of your accounting period you will submit a final declaration. The final declaration will replace the Self Assessment Tax Return.
As we are still quite a way from this date there are not yet many compatible software providers on the HMRC list but I would expect over the next year for more and more to be included.
Planning for MTD phases 2 and 3
If you are going to be affected by the next phases of MTD it is worth starting to plan for it now.
Things you could do:
If you are already VAT registered and using compatible accounting software there is nothing to stop you registering with HMRC early to get it out of the way.
You can use the start of your next accounting period to begin using compatible accounting software so that you have time to get to grips with it before it becomes compulsory.
Get into the habit of keeping on top of your accounting records quarterly. Not only will this be beneficial to your business it will mean it is not a big shock when the time comes.
Speak to your accountant to discuss the best options for you and your business.
More detailed information can be found on HMRC here.
If you have any questions or would like to find out more please feel free to get in touch.