MTD for VAT
Updated: Aug 19, 2019
· The main principles of MTD are that you’ll be submitting tax data through software rather than directly to HMRC and you’ll need that software to keep some of your records digitally;
· MTD starts in April this year but only for VAT;
· Those using software like FreeAgent will likely already be close to MTD compliant;
· MTD for other taxes and non-VAT registered businesses is still a few years away.
What is MTD?
Making Tax Digital (MTD) is the name of a government scheme that aims to make the tax system more efficient by digitising it. The end goal is that rather than submitting your accounts and corporation tax return at some point in the 9 months after your accounting year-end, you’ll submit information to HMRC every quarter with a 5th and final submission after the year-end. You’ll also need to be doing this through ‘MTD ready’ software rather than through the HMRC website. MTD will start in April this year but only for VAT submissions and will include much fewer businesses than the original plans so while reporting profits to HMRC 5 times a year will soon be the reality, it’s probably still 2 years away.
When will MTD hit your business?
MTD for VAT starts 1st April 2019 for all businesses that are VAT registered AND have a taxable turnover of over £85k per annum. For businesses that are VAT registered but have a turnover of less than £85k, switching to MTD isn’t essential until 1st April 2020 but if you use cloud software like FreeAgent it should be a very simple process so we would recommend switching to MTD for VAT as soon as possible.
The start date means that your first VAT period starting on or after that date will need to be MTD compliant. For example, if your VAT quarter runs from 1st March to 31st May 2019, the first MTD VAT return would be for the following quarter ending 31st August 2019.
MTD for income tax, corporation tax and non-VAT registered businesses will likely start in 2021 but this has not been confirmed yet.
If you’re unsure which date includes you, feel free to give us a call or drop us an email and we’ll be happy to help (if you’re already a client we’ll be in touch shortly to assist you with the transition).
What exactly will change?
Even if you’re a VAT registered business with turnover over £85k, there’s a chance nothing will change for you because you may already be MTD compliant so you’ll just need to register for an MTD account with HMRC. From 1st April 2019 qualifying businesses will have to submit their VAT returns through ‘MTD ready’ software as the online HMRC portal will no longer accept submissions. The list of ‘MTD ready’ software is long and still growing but most of the big names like FreeAgent, Xero and QuickBooks have been ready for this for some time. Our clients predominantly use FreeAgent so we have first-hand experience of making the switch to MTD through their software and it’s very easy.
The only other change is that you will need to keep digital VAT records but if your using software like FreeAgent, you’ll be doing this anyway. Keeping digital records doesn’t mean you’ll have to scan all your receipts and invoices and attach them to each transaction. It just means that the software you’re using to submit your VAT returns will need to have the transactional data too e.g. date, value and VAT rate (if you’re on invoice accounting, this means you need to add all sales and purchase invoices to the software). You’ll still need to keep your receipts and invoices, but this doesn’t need to be in a digital form.
Why is MTD coming?
The ‘why’ behind MTD is often overlooked because it’s definitely coming and there’s nothing we can do about it so everyone focuses on the ‘what’ and the ‘when’. HMRC officially states that MTD aims to transform the tax system to make it ‘more effective, more efficient and easier for taxpayers to get their tax right’. When MTD is fully in place for all taxes this should be the case as we will all be reporting profits quarterly and while HRMC hasn’t confirmed it, we’ll probably be paying all taxes on at least a quarterly basis too.
There is currently a very large tax deficit because if a business made a profit of £1,000 on the first day of their accounting year, £190 would be due to HMRC in corporation tax but it wouldn’t be due to them for 21 months. With MTD in place, they will almost certainly start asking us to pay that tax within 3-4 months to reduce the deficit.