There have been a lot of changes to HM Revenue & Customs’ scheme to make everyone digitally report their tax liabilities since it was first mooted three years ago. Fortunately, in most cases, HMRC have listened to reason and have not introduced it in its most draconian form (yet). But to all intents and purposes, it is here. Making Tax Digital (MTD).
Who will it apply to?
Eventually most businesses and landlords will have to comply but it will initially apply from 1 April 2019 for VAT purposes only, to businesses that have a VATable turnover above the VAT threshold (currently £85,000). So, if you have voluntarily registered for VAT and your turnover is below the £85,000 level, you are not yet affected – but watch out. Check your turnover every month and if the 12 months prior has exceeded the threshold, you have to apply MTD from the following month. And under MTD, once in, you stay in. This is the case even if your turnover later drops. MTD will also apply to landlords with VATable commercial property, charities, and pension plans.
What happens if I am caught?
Put simply, you must store your business records on a digital format that is able to communicate with HMRC computers and make quarterly reports to HMRC; initially for VAT only, but some time after 2020 also potentially for Income Tax and Corporation Tax.
HMRC are not providing software to be able to do this.
Whilst most up to date big-brand accounting packages such as Sage Business Cloud, Sage 50/200, Quickbooks and Xero are all expected to become MTD compliant, there will be some packages that will not be compliant. It will be critical that you keep your software up to date with the latest version. In theory, an Excel spreadsheet and a conversion program should work but it is unlikely to be that user-friendly.
Whilst not every system currently in use will become MTD compliant (possibly because it is no longer supported), not every bookkeeping system is the same and you should not be forced into using something that does not fit your business. If you are going to be in the position of having to change to a new system, you should shop around to find one that is best suited to what you do – a garage may need a different system to an architect or a travel agent, for example. Don’t leave it too long to look around, however, as the closer MTD gets, the busier everyone will be preparing for it – especially if you may need to have data converted or receive specialist training
Most accountants are now writing to their clients and undertaking reviews of their bookkeeping services but there are a number of un-represented businesses and taxpayers who will need to check their systems carefully to ensure that they are ready for when the new system comes. If you do have an accountant and have not heard from them yet – be proactive and ask them as they may not have gotten to you yet
I am not VAT registered – should I be concerned?
Other businesses with less than £85,000 turnover, most landlords, partnerships and the self-employed will have longer to prepare. Because HMRC have had to redeploy staff and resources to meet the challenges of making the tax system Brexit-proof (which largely involves work on international trade systems), HMRC have announced that they have stopped work on the introduction of the next phase of MTD for Individuals. Although the planned introduction of MTD for Individuals was to be April 2020, this introduction target date is now looking increasingly unlikely.
And the redeployment of HMRC staff and resources to deal with Brexit is having another bonus as well – the current roll-out of the problematic “Simple Assessments” scheme (whereby you only have 60 days to agree or correct HMRC’s calculation of your tax position) has also been halted. (Whether this means that no additional groups of taxpayers will be added to the scheme or whether they are pausing the entire “Simple Assessment” program is uncertain as at the point of writing)
But make no mistake, increased digitalisation will be introduced for everyone and there will be very few exceptions to those who will have to comply. So think ahead for those who are looking into investing in new software or bookkeeping services – will your systems be able to adapt in the future