Making Tax Digital represents the largest shake up to the UK tax system in decades and spells the end of manual VAT return preparation for most UK businesses.
From 1 April 2019 all VAT registered businesses in the UK will be legally required to:
- Maintain their accounting records digitally;
- Ensure there are digital links between financial software within the business; and
- Submit VAT returns to HMRC using compatible software.
The changes mark the opening phase of the government’s planned MTD regime, which will eventually expand to requiring all UK taxpayers to file digital tax returns for VAT, Income Tax and Corporation Tax purposes.
At present the later phases for income and corporation tax have been postponed until April 2020 at the earliest.
What Does It Mean?
At present around 88% of all VAT returns are submitted using HMRC’s online VAT portal. With effect from 1 April 2019, this portal will be withdrawn in all but a few circumstances.
From this date, returns will have to be made Under MTD all submissions must be made digitally through HMRC-approved software or API-bridging software. The latter option will enable records to be maintained in API-enabled Excel documents, but this is likely to involve a complete change in layout to any current Excel documents you may be using a present.
Furthermore, with the planned expansion of MTD to other areas of the tax system, we recommend that all clients consider the most beneficial option over the longer term.
The new MTD framework will require all VAT-registered businesses to maintain their records in a digital format. Although manual records will no longer be permitted, the MTD regulations do not require your actual invoices to be retained in electronic format. Instead, the changes focus on how the accounting records themselves are maintained:
- Daily till takings can be taken from a cash register, before being manually entered into a suitable software. This still meets the requirements for digital record-keeping.
- Entering a weekly or monthly summary, however, would not satisfy the requirements.
- Businesses which are partially exempt may keep the monthly/annual adjustment in a manual format.
The requirements to maintain digital records are complex, but will see increased record-keeping requirements including:
- Recording varying VAT rates on an invoice as separate lines (i.e. not just a single ‘mixed’ VAT figure).
- Transfers of data from one financial system to another must be done digitally.
- Recording the rate of VAT for each sale made.
Key to making a success of MTD will the ability to properly plan for the changes that it will bring to your business.
With the changes scheduled to start from 1 April 2019, business owners should be taking action now to identify suitable software products and to properly plan their implementation and staff training.
We at Coburn McKenna offer a friendly, proactive service to all of our clients and already help a wide range of businesses in handling their VAT compliance. As Xero certified cloud accountants, we are already helping our clients to migrate from manual and/or outdated systems to a fully MTD-compliant software with minimal effort.