Does the mention of the letters “MTD” make you feel uneasy or give you sleepless nights? What is changing? What should I be doing?
Don’t panic! Check out the position now and there is still time to take action.
What is MTD?
MTD (or making tax digital to give it its full name) is part of the government’s plan to encourage the keeping of digital records and digital communications with the aim to make HMRC’s job easier and to bring in more taxes by reducing errors on tax returns.
MTD for VAT is being rolled out first. You don’t need to worry about it applying to any other taxes yet. But aren’t we already submitting our VAT returns digitally? Most of us haven’t filled out a paper form in years. If your annual turnover is below the VAT threshold of £85,000 you can carry on as you are and stop reading now. The rest of us, however, have a new set of rules to follow.
The rules tell us we must keep digital records and submit returns to HMRC using ‘functional compatible’ software. We will no longer be allowed to log into that familiar HMRC portal and type the numbers directly into the boxes of the quarterly return.
So, what is functional compatible software?
This is software that stores data digitally and has a two way communication system with HMRC. If you use an up-to-date cloud-based accounting package then this will probably be OK. Check that it is on the list of approved software at https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat.
Xero, Quickbooks, Kashflow and Sage Business Cloud all produce compliant software – just check with your supplier that you are using the right version.
How about if I use spreadsheets to keep my accounts?
A spreadsheet on its own, whilst being digital, does not contain the necessary two way communication. You have two options. One is to use ‘bridging software’. This is a piece of software that provides a digital link between your spreadsheets and HMRC. You can find details of compliant bridging software by following the same link mentioned before. Alternatively, you could move to an appropriate cloud based accounting package.
If your records are paper based then you have probably already concluded that you will need to make some big changes! The best starting point is to talk to your accountant. They should be able to recommend a suitable solution – perhaps an accounting package they can help set you up with, or they may offer to take the bookkeeping off your hands.
As a last resort it may be worth considering whether it is worth applying for an exemption. HMRC accept that it may not be practical for a small number of people to keep digital records for reasons of age, disability, location or religion. However, it is thought that if you currently file your VAT returns using the HMRC portal then you will probably not qualify for this.
Are there any benefits to me?
It sounds like a lot of work. The up side of the new regulations is that many people are finding that the new accounting software they have adopted is actually helping their business in unforeseen ways. Quotes can be sent out quickly from the mobile apps that many of the systems incorporate, accelerating new business, and customers pay quicker when they are given the facility to pay their invoice by card. Administration time is reduced and it is easier to keep track of your profits.
When does MTD start?
The rules come into play for your VAT quarter starting on or after 1 April. This means VAT returns for quarters up to 31 May can be produced the old way. The first VAT quarter that is mandatory under MTD is 1 April to 30 June. This gives us a little breathing space left to make sure we have the right systems in place. Don’t forget though, that your accounting data for the entire quarter will need to be incorporated into your new system so it’s best to sort this out sooner rather than later so you don’t fall to far behind with your bookkeeping.
Is there anything else I need to do?
You need to register for MTD with HMRC at https://www.gov.uk/guidance/sign-up-for-making-tax-digital-for-vat. Have your VAT number, government gateway ID and password to hand. Sign up at least one week before you plan to file your first MTD VAT return. (If you currently pay your VAT by direct debit avoid signing up 7 days before or 5 days after a VAT return is due). Beware though of signing up too early. Make sure you have filed your final VAT return under the old system before registering or you may accidently early adopt!
What if I get it wrong?
There is a penalty framework although HMRC is expected to be lenient during the first year provided a reasonable effort has been made to comply with the rules. If you can’t manage to submit your first VAT return on time under the new system, make sure you at least pay your VAT before the deadline. This will avoid a monetary penalty for late filing which is based on a percentage of the outstanding tax.
Who can I ask for help?
HMRC have plenty of help pages, and even a video showing you how to register for MTD. Do also ask your accountant and your software provider who will be geared up for this. Keep an eye on our blog for more information.