Making Tax Digital: What you need to know

Making Tax Digital is the UK government’s latest move to modernise the tax system for businesses and individuals alike.

Businesses and sole traders will use their digital tax accounts as a hub for updating their information, registering for tax services, and managing payments. Making Tax Digital was originally set to be implemented in 2018, but concerns from businesses pushed this date back to April 2019, when only VAT elements will go live.

Why is the government implementing Making Tax Digital?

The aim of the new system is to make it easier for individuals and businesses to manage tax, in order to reduce errors and increase efficiency. The Exchequer lost £8 billion in 2014-15 due to avoidable tax mistakes made by individuals and businesses - it is hoped that a new digital system could prevent many of these costly errors.

There are four ‘foundations’ to Making Tax Digital:

• Better use of information. You won’t need to give HMRC information it already has or can obtain from elsewhere. At any time, you can check the information that HMRC holds on your digital tax account.
• Tax in real time. There will be no need to wait until the end of the year (or even later) to know how much tax you need to pay. Everything will be processed as close to real-time as possible.
• A single account. View liabilities and entitlements all in one place - just like online banking - by 2020.
• Interact digitally with HMRC. The system will see expanded digital support via secure messaging by 2020.

Making Tax Digital is an ambitious project, but we think that all businesses will benefit from it if HMRC stay true to these four principles.

What exactly is going to change in April 2019?

From April 2019, businesses with a turnover above the VAT threshold will have to keep their records digitally for VAT purposes. You’ll also need to submit your VAT records directly to HMRC via software that’s compatible with Making Tax Digital. Once completed, you’ll be able to view this information in your digital tax account.

Businesses voluntarily registered for VAT that remain under the threshold won’t be subject to Making Tax Digital at this stage.

Why do I need Making Tax Digital compatible software?
Once the new system is implemented, you won’t be filling in boxes on HMRC’s website. Instead, you’ll be sending VAT information directly from your accounting software to HMRC via an ‘Application Program Interface’, similar to how current submissions work for PAYE and CIS, for example.

What about corporation and income tax?

While VAT is the first element to be covered by Making Tax Digital, businesses will need to report other taxes through the new system in the future. There’s no set date for when this will occur, but HMRC say it won’t be before MTD for VAT has been shown to work well, and not before April 2020.

What if I submit information late?

Penalties will be point-based. You’ll incur points each time you’re late with a submission, per tax. Points will be reset after a period of good compliance. Penalties will be incurred once you pass a certain threshold of points.

What are the potential benefits for our business?

Once everything’s set-up, Making Tax Digital should streamline how you manage and pay tax. There’ll be less uncertainty in terms of payments, helping you plan and budget more effectively. The idea is that you always know where you stand in terms of tax, and can easily check your information online whenever you need to.

Because the information is drawn from your software automatically, you’ll eliminate errors caused by re-entering or transcribing information manually.

The government hopes that businesses will save time with Making Tax Digital, improving overall productivity and helping businesses stay competitive.

What do I need to look out for?

Speak to your current software provider to find out their plans for Making Tax Digital. If you don’t use accounting software, now’s a good time to evaluate your options so that you have plenty of time to upgrade and set things up before April 2019.

If you use an accountant, they should already be aware of Making Tax Digital and the new reporting requirements.

Summary

Modernising the tax system is important for the government, and has the potential to help businesses to manage costs.

Contact your account manager today for more information on Integrity's approach to MTD.