Don’t be an ostrich
– You need to be ready for MTD for VAT AND Self-assessment
Below is a modified extract from an
article on HMRC’s website – it is intended to give the whys and wherefores of
the need for MTD readiness for businesses and for those sole traders
and
individuals whose taxable earnings from self-employment exceeds £10,000 per
year. This would include landlords as well.
The content is, I regret, very long
and somewhat dry, but it is very important it is understood by the relevant
organisations and individuals that there is an imperative requirement to
comply – just ignoring the facts will inevitably result in problems with
tax issues down the line. There are new penalty procedures being introduced
by HMRC that could prove very expensive should these be necessary to be levied
by HMRC on those organisations and individuals who do NOT comply.
Since 2019, the vast majority
of VAT-registered businesses with a taxable turnover above
the VAT threshold (£85,000) have been mandated to keep
digital VAT records and send returns using Making Tax Digital
(MTD)-compatible software. From April 2022 these requirements will apply to
all VAT-registered businesses.
MTD for Income Tax Self-Assessment
(ITSA) will apply to individuals from April 2024, if their total gross income
from self-employment and property exceeds £10,000 in a tax year.
The background
to MTD
Increasingly, businesses and agents see the benefits of
digitisation. Millions of businesses are already banking, paying bills and
interacting with their customers or suppliers online, and many are already
using accounting software.HMRC’s ambition is to become one of
the most digitally advanced tax administrations in the world
and MTD is making fundamental changes to the way the tax system works
— transforming tax administration so that it is:
- more effective
- more efficient
- easier for taxpayers to get their tax right
The move to digital integration will
eliminate many of the existing paper-based processes, reducing errors and
allowing businesses and their agents to devote more time to running their
business. Many businesses use an agent (such as me) and MTD allows
agents to continue to provide a full service in supporting their clients.
HMRC knows that the majority of customers want to
get their tax right but recent tax gap figures (2018 to 2019) show too many
find this hard, with avoidable mistakes costing the Exchequer almost £8.5
billion a year. The improved accuracy that digital records provide, along with
the help built into many software products and the fact that information is
sent directly to HMRC from the digital records avoiding transposition
errors, reduces the amount of tax lost to these avoidable errors.
Since 2019, VAT-registered
businesses with a taxable turnover above the VAT threshold (£85,000)
have been mandated to keep digital VAT records and send returns
using MTD-compatible software. The next step is to
extend MTD for VAT to all VAT registered
businesses from April 2022. Over 280,000 businesses under
the VAT turnover threshold have already joined voluntarily and are
experiencing the wider benefits MTD can bring.
MTD for ITSA will
apply to individuals from April 2024, if their total gross income from
self-employment and property exceeds £10,000 in a tax year.
Important facts
about MTD
Businesses and landlords who
join MTD must keep their business records digitally and send tax
information to HMRC directly from those records. This would mean storing those records in
software that can be recalled when required, but would also need to be compatible
with HMRC’s systems for submission of the relevant returns
VAT
From April 2022
all VAT-registered businesses will be mandated to keep digital VAT records
and send returns using MTD-compatible software.
The deadlines for
sending VAT returns and making payments have not changed. That means
that, if you are not already submitting VAT through the MTD system, the
deadline for do so for the April 2022 to June 2022 VAT quarter will be 7th
August and this MUST be via MTD.
Businesses need to use software to
keep their business records digitally. This may include dedicated
record-keeping software or a combination of software packages or spreadsheets.
Since 1 April 2019, software that
prepares a VAT return to send to HMRC must
be MTD-compatible for those mandated to use MTD. Data must also be
exchanged digitally between all software used by a business for VAT. The
information contained with the MTD VAT return is generated by
pulling information from the digital records. This information is the 9 boxes
required for the VAT return.
In the case of spreadsheets, this
means that the software must be capable of taking the relevant information from
the spreadsheet electronically and sending it to HMRC.
It IS possible to
submit MTD for VAT through your own (or your business’s) Government Gateway by using
what is known as bridging software, but you would be far better using an agent
such as myself to prepare and
submit the return on your behalf – we are able to deal with HMRC on your behalf
on issues that might arise.
Income Tax
MTD for ITSA will
apply to individuals from April 2024, if their total gross income from
self-employment and property exceeds £10,000 in a tax year. Most businesses and
individuals will have over 2 years to prepare and test the service voluntarily
prior to its introduction.
There is a major change to the way
that Self-Assessment will be handled from April 2024:
Businesses and landlords who
join MTD for Income Tax will need to send a quarterly summary
of their business income and expenses to HMRC using MTD-compatible
software.
In response they will receive an estimated tax calculation based on
the information provided to help them budget for their tax. At the end of the
year, they can add any non-business information and finalise their tax affairs
using MTD-compatible software. This replaces the need for a Self-Assessment
tax return.
The deadlines for finalising tax
affairs and making payments are not changing. Businesses and landlords will be
able to use their software to send all of the information that they need to
under Self-Assessment, not just their business or rental income. This includes
employment income, bank and building society interest, dividends, pension
contributions, student loan repayment etc. Software developers will need to
continue to build this additional functionality into their products, resulting
in a richer experience for customers as MTD continues to develop.
Software
When referring to MTD-compatible
software, they mean software that can integrate with HMRC systems to
send updates to HMRC.
HMRC is not offering its own
software products but has provided a list of commercially available software
that fulfils the criteria. The benefit of this approach is that commercial
software developers can offer a more flexible and tailored range of options,
functionality and technical support that can cater not just to the requirements
of the general business population but also specific businesses and sectors
like agriculture, construction, landlords and freelancers.
Details of MTD-compatible software products for Income Tax and MTD-compatible software products for VAT are
available on GOV.UK and this information will be updated as and when new
products become available.
The advantages of
digital record-keeping
Businesses, regardless of turnover,
can benefit from using software to keep digital records. Software not only
helps the effective running of a business but also reduces avoidable errors in
business records that can occur when manual calculations are performed, or
information is transposed by hand.
By keeping up to date digital records
in real time, businesses can also reduce the risk of errors due to lost or
incorrectly recorded invoices.
Going digital makes managing business
finances more straightforward. Millions are already banking, paying bills and
interacting online — going digital with business records and taxes is
the next
step, giving business more control and better capability to forward plan with
their finances.
Keeping business records digitally
means that it’s easier for a business to share their records with their agent, saving both time and costs,
and allowing agents to focus on more value-added activity.
Find out more
about MTD for VAT
Since 2019 VAT-registered
businesses with a taxable turnover above the VAT registration
threshold (£85,000) have been required to keep digital VAT records
and submit their VAT return
to HMRC using MTD-compatible software and these requirements
will apply to all VAT-registered clients from April 2022.
Taxable turnover includes standard,
reduced and zero rated. But does not include exempt supplies or income outside
the scope of VAT.
Once a business starts
using MTD for their VAT returns, it can no longer file
returns using the HMRC online portal.
Find out more
about MTD for Income Tax
MTD for ITSA will
apply to individuals from April 2024, if their total gross income from
self-employment and property exceeds £10,000 in a tax year. Most businesses
will have 2 years to prepare and test the service voluntarily prior to its
introduction but eligible businesses can take advantage of the opportunity to
go digital for Income Tax now. For more, see guidance on signing your business up to MTD for
Income Tax
Businesses can sign up if they’re a
sole trader with income from one business and/or are landlords.
If a business that signs up
to MTD for Income Tax has no other income to provide
to HMRC they won’t need to complete a separate Self-Assessment return.
Where additional personal income
needs to be reported, such as employment income, bank and building society
interest, dividends and Gift Aid, additional functionality will be made
available in the coming months to allow software providers to build this into
their products, meaning many more businesses will be able to send all of their
additional personal income details using MTD.
Here, you can find more information
about MTD for Income Tax. You can also find out
more about which software products are already compatible
with MTD for Income Tax and HMRC will continue to
update this information as more products become available.
MTD: frequently
asked questions
HMRC has answered the most frequently
asked questions that businesses and agents
have about signing up for MTD and starting to use software to keep
digital records. They will continue to update this information.
What is MTD?
MTD is a key part of the
government’s plans to make it easier for businesses to get their tax right and
keep on top of their tax affairs. HMRC’s ambition is to be one of the most
digitally-advanced tax administrations in the world, modernising the tax system
to make it more effective, more efficient and easier for customers to comply.
Businesses need to keep digital
records and use compatible software to send their VAT returns or
Income Tax updates to HMRC and receive information.
Keeping digital records and providing
updates to HMRC directly through MTD-compatible software helps
reduce errors, cost, uncertainty and worry. This streamlined digital experience
integrates tax into day-to-day business record-keeping, so that businesses can
view their tax position in-year and be confident that they have their taxes right.
What do businesses
need to do to be ready to sign up for MTD?
You must start keeping your business
records digitally before you can sign up for MTD. If you already use
software to keep your business records, check with your software provider
for MTD compatibility. If you don’t use software yet, or your
software is not MTD-compatible then you’ll need to consider what software,
or bridging software, is most suitable for you.
You can find out
what MTD software is available for the Income Tax
and VAT service by visiting the software choices page on GOV.UK and HMRC will
continue to add to this in the coming months as more products become available.
If you have an agent, you should speak to them
first about when it would be best to sign up for MTD.
What records do I
need to keep digitally for MTD?
For VAT
MTD does not require you to keep
additional records for VAT, but to record them digitally.
Your digital records should include,
for each supply, the time of supply (tax point), the value of the supply (net
excluding VAT) and the rate of VAT charged.
They should also include information
about the business, including business name and principle business address as
well as your VAT Registration Number and details of
any VAT accounting schemes you use.
Customers who currently record daily
totals can continue to do so, but they have to be captured digitally.
If you use spreadsheets to keep
business records, you’ll need MTD-compatible software so that you can send HMRC your
quarterly VAT returns and receive information back from HMRC.
Bridging software may be required to make spreadsheets MTD-compatible.
For Income Tax
You’ll have to use software to
capture details of all your business income and expenditure for the entirety of
your accounting period.
Your business records will include
details from invoices and receipts for purchases and as a minimum should
include the date, the amount and the category.
Many businesses already use record
keeping software and it’s important to check when this software
is MTD-compatible or find out whether it integrates with other software
that can make quarterly submissions (bridging software). If you are unsure
about how to enter information into your software, you should speak to your
software provider.
If you use spreadsheets to keep
business records, you’ll need MTD-compatible software so that you can
send HMRC your quarterly updates.
What do you mean
by MTD-compatible software?
Compatible software is a software
product or set of software products, that between them support
the MTD obligations of keeping digital records and exchanging data
digitally with HMRC through the MTD service. If more than
one application is being used, then data that flows between those applications
must also be exchanged digitally.
Digital records can be kept in a
range of compatible digital formats. They do not all have to be held in the
same place or on one piece of software. For example, a spreadsheet can be a
component of digital record keeping provided the product that consolidates
records, or summary records from the spreadsheet is digital.
Businesses should discuss with their agent or software provider if in
doubt.
What is bridging
software?
Bridging software is
how HMRC describes the digital tool that can take information from
other applications, for example, a spreadsheet or an in-house record keeping
system and then lets the user send the required information digitally
to HMRC in the correct format.
Can I still use
spreadsheets for my business records?
Spreadsheets may be used to record
and store business transactions digitally. However, those spreadsheets must be
able to submit the required data to HMRC digitally, for example,
using bridging software or an API enabled spreadsheet that can
integrate directly with HMRC systems.
The bridging software must be capable
of extracting or receiving the information from the spreadsheet digitally and
then sending it to HMRC systems.
BUT the summary information must not be
physically re-typed into another software package.
Can I still use spreadsheets
for my tax calculations?
A spreadsheet can be used to
calculate or summarise detailed VAT transactions to arrive at the
summary information you are obliged to send HMRC.
However, those spreadsheets must be
able to submit the required data to HMRC digitally, for example,
using bridging software.
The bridging software must be capable
of extracting or receiving the information from the spreadsheet digitally and
then sending it to HMRC systems.
The summary information must not be
physically re-typed into another software package.
How do I find out
what software is available for MTD?
Will free software
be available for businesses?
Free software is available
and HMRC is working very closely with the software industry to ensure
the availability of a wide range of products for businesses at a variety of
different price points. There are no plans for HMRC to offer its own
software products.
Many existing software packages have
been updated for existing subscribers to provide compatibility with MTD.
In many cases, software will be updated as part of a regular update cycle to include
security updates and new functionality like MTD.
When
will MTD for VAT be mandatory for my business?
MTD has been mandatory for
all VAT-registered businesses with a taxable turnover above
the VAT threshold since 1 April 2019 (or 1 October 2019 for deferred
businesses), and also mandatory for all VAT-registered businesses from
April 2022.
When
will MTD for ITSA become mandatory? MTD for ITSA will
apply to individuals from April 2024, if their total gross income from
self-employment and property exceeds £10,000 in a tax year.
How
many VAT returns will I have to send
under MTD for VAT?
For VAT, MTD doesn’t
change how often businesses have to send information to HMRC, but rather
how they do it. Under MTD, records of business transactions must be kept
digitally, and businesses (or their agents)
will submit their VAT return through MTD-compatible software. VAT-registered
businesses do not need to provide more information, or more regularly, than
they do now, and payment deadlines are unchanged.
What if my
taxable VAT turnover is below the threshold?
Businesses already have to check
their turnover for the last 12 months at the end of each month to see if it
exceeds the VAT threshold. If it does, then MTD applies
from the first day of the following month.
If VAT taxable turnover
subsequently falls below the VAT registration threshold businesses
must continue to follow the MTD rules.
How have
submissions of VAT returns changed?
Businesses within the scope
of MTD for VAT are required to send
their VAT returns to HMRC using MTD-compatible
software. They are no longer able to submit VAT returns using
the HMRC portal. Businesses who already record their transactions
digitally, and then file using HMRC’s online service using MTD-compatible
software will speed up the submissions process and reduce the likelihood of
errors, especially transposition errors.
Where do I get help
to sign up for MTD?
What if a business
doesn’t have internet access or can’t use it?
Since 2019, VAT-registered
businesses with taxable VAT turnover above the VAT threshold
have been required to keep digital records and send returns
to HMRC using compatible software. These requirements apply to
all VAT-registered businesses from April 2022.
However, HMRC recognises
that not everyone will be able to do this. Where for example a business is run
entirely by practicing members of a religious society whose beliefs are
incompatible with the requirements of the regulations (for example, those
religious beliefs prevent them from using computers) they may be exempted.
Additionally, if it is not reasonably
practicable for you to use digital tools to keep your business records or
submit your returns, for reasons of age, disability, remoteness of location or
for any other reason, you may be exempted. You should contact the VAT helpline
if you think this applies to you. HMRC also provides digital
assistance if an exemption is not appropriate.
Businesses subject to insolvency
procedures do not have to use MTD.
What if I am
already exempt from online filing for VAT
Exemptions from MTD for VAT are
the same as those that are already in place for online filing for VAT.
Some examples are given above. If you are already exempt from filing
your VAT return online, you will continue to be treated as exempt for MTD for VAT.
In the case of spreadsheets, this
means that the software must be capable of taking the relevant information from
the spreadsheet electronically and sending it to HMRC.
The deadlines for finalising tax
affairs and making payments are not changing. Businesses and landlords will be
able to use their software to send all of the information that they need to
under Self-Assessment, not just their business or rental income. This includes
employment income, bank and building society interest, dividends, pension
contributions, student loan repayment etc. Software developers will need to
continue to build this additional functionality into their products, resulting
in a richer experience for customers as MTD continues to develop.
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