Everything you want to know about Making Tax Digital for VAT – but were too bored to ask

Making Tax Digital may not sound like the most interesting subject under the sun, but it could have a big impact on your business. Andy Chamberlain has the lowdown…

Making Tax Digital for VAT

One of the biggest changes to take effect in 2019 which impact self-employed businesses are the new digital reporting requirements under Making Tax Digital (MTD). 

 

MTD for VAT starts in April 2019. Businesses with a turnover which is more than the VAT threshold (£85,000) will be required to keep VAT records digitally and submit returns electronically, via new software.

 

MTD for VAT is part of a much wider programme of reform – Making Tax Digital – which will ultimately change the way all businesses, including the self-employed, account and pay tax. The government’s vision is for MTD to simplify the tax process, both for taxpayers and HMRC. The annual self-assessment process will be consigned to the history books, and replaced by more frequent, digital updates that will report directly to HMRC via compatible software.

The first step for this new tax revolution is VAT. If your business isn’t VAT registered, you won’t be impacted now, but as other taxes and types of business are incorporated over the coming years, the likelihood is you will be.

From April, VAT returns will have to be made via specific software, on a quarterly basis. Most businesses are already required to report VAT quarterly, so the frequency of the reporting and the data being reported won’t change. The only change is a technical one – VAT data will have to be inputted into software; typically this will be through an app on your smartphone, tablet or laptop, which will send a report to HMRC at the click of a button.

There are several software products available now, and more are being developed (a full list can be found on gov.uk). These are all commercial products. HMRC doesn’t offer its own software. There was a time when HMRC insisted that software would be available for free; that appears to have been forgotten and most products that we’ve seen come at a cost – not a prohibitive cost, but a cost none the less.

 

Many businesses use an accountant to submit their VAT returns for them. In these cases, MTD for VAT shouldn’t cause you too much trouble, but it will probably still require the use of new software to keep your VAT records. Speak to your accountant (if you haven’t done so already) to make sure he or she has everything they need from you, and that the software you’re using is compatible with MTD for VAT requirements.

Others file their own returns. They will have to adapt to the new requirements. For many, VAT records are kept on a simple spreadsheet. You can continue to keep records on spreadsheets, but the data will have to be inputted into the new software in order to send the report to HMRC.

 

Some companies have designed ‘spreadsheet bridging software’ that will automatically feed the data from the spreadsheet to the new software. Generally, the advice to people who want to submit their own returns is to seek some guidance from an accountant, at least in the first instance, to make sure you’ve got the right processes in place.

 

If you have voluntarily registered for VAT (but your business turnover is under the threshold of £85,000) you will not have to comply with the MTD requirements in April. For the time being, you can continue to record and report VAT as before.

In October last year, HMRC opened the public beta phase for piloting the scheme. Businesses that are so inclined can use register now and start the process on the government website.

 

Jordan Marshall, policy development manager at IPSE, The Association of Independent Professionals and the Self-Employed, said: “The initial timetable for MTD was way too ambitious and the wrong businesses were being targeted first.

 

“We are grateful to the government for heeding our calls to reconsider its approach. Initially, HMRC was to onboard the very smallest businesses and make Income Tax returns digital. They set a very low threshold for exemptions (£10,000 turnover). This would have caused problems, as a surprisingly large number of very small businesses still keep paper records.”

Jordan added: “The 2017 general election provided an opportunity to rethink the timetable. Starting with VAT makes much more sense, as it’s already reported quarterly and, in most cases, records are already kept digitally.

“The requirement to purchase new software, and get used to using that software, will inevitably cause some consternation, but overall we can see the long-term benefits of a more digitally integrated system.

“We are still dubious about the quarterly reporting requirement for Income Tax and Corporation Tax, but that’s not here yet. We will continue to question that aspect of the new system at the appropriate time.”

More information on MTD and MTD for VAT can be found on gov.uk.

Meet the author

Andy Chamberlain

Deputy Director of Policy and External Affairs