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Requirements of the UK’s ‘Making Tax Digital’ Initiative

Businesses in the United Kingdom, both large and small, are facing some highly uncertain times of late. First, the spectre of Brexit remains after the 2016 membership referendum, as politicians have failed to finalise the finer points of an exit plan. On April 1, another significant shift took place with Her Majesty’s Revenue and Customs (HMRC) putting in place the Making Tax Digital (MTD) initiative. While most businesses dreaded and continue to dread MTD, it might be one of the more positive outcomes of recent years.

What is ‘Making Tax Digital’?

With the HMRC’s Making Tax Digital plan, it is mandatory for VAT-registered businesses making more than £85,000 in revenue to maintain records and submit VAT returns digitally. Making Tax Digital has three primary aspects of the tax system that it’s trying to improve.

  • Effectiveness – Record and keep more accurate records with fewer errors and miscalculations.
  • Efficiency – Cut down on time spent by businesses, accountants, and HMRC through faster processes and automation.
  • Easiness – The entire approach to taxation should be simpler and easier.

What are the specific requirements?

After April 1 2019, businesses meeting the VAT threshold have to keep a few things in mind.

  • Maintain accounting records using software, which can include spreadsheets. Paper records will no longer meet the legal requirements.
  • Submit VAT returns to HMRC using compatible software that can access the HMRC’s API (Application Program Interfaces) platform.

For a list of compatible software, including the appropriate cybersecurity options, this article from The Institute of Chartered Accountants in England and Wales (ICAEW) will be most helpful.

Bookkeeping standards

Each business transaction must be recorded and stored electronically. Businesses can continue to keep invoices and records in paper form, but the electronic data must be maintained. HMRC recommends that transactions be recorded in real time, but updating databases and software quarterly is also acceptable with the correct guidance. In such a scenario, a bookkeeper’s or agent’s services will be needed.

These are the specific records that need to be kept electronically due to Making Tax Digital.

  • Designatory information such as the VAT registration number and the VAT scheme used need to be kept online.
  • For sales that have been made, you need to record the time of supply, the value, and the VAT rate charged.
  • For purchases, you need to record the time of supply, the value of the supply, including VAT that can’t be claimed, and the amount of input tax that can be recovered.
  • The VAT account must be handled electronically. This account connects the business records to the VAT return, so records of all input and output taxes must be kept.

Who is exempt?

A six-month delay applies to around 40,000 businesses within the following categories, so they don’t have any immediate need for Making Tax Digital. However, they’ll adopt MTD policies starting October 1.

  • Trusts
  • VAT divisions
  • VAT groups
  • Certain public sector entities that need to provide additional information with their VAT return
  • Public corporations
  • Those required to make payments on account
  • Annual accounting scheme users
  • Overseas traders
  • Non-profit organisations that are not companies (including some charities)

In addition to the delayed adoption by the above organisation types, businesses can seek exemptions under the following conditions.

  • Owners or employees can’t access electronic tools due to age, disability, the remoteness of their location, or any other valid constraint.
  • The business is undergoing insolvency procedures.
  • The business is run by a religious group whose beliefs prevent the use of electronic tools.

What stays the same?

Despite the submission process for VAT returns changing considerably, many parts of the law will remain the same.

  • Making Tax Digital doesn’t apply to VAT-registered businesses making under £85,000 in revenue. However, these firms can choose to opt in on a voluntary basis.
  • VAT rules unrelated to bookkeeping and filing will stay the same.
  • The amount of information submitted to HMRC is unchanged. The VAT return will still have the same nine boxes to fill.
  • The current VAT filing and payments deadlines still apply.

Key takeaways

Currently, Making Tax Digital only applies to VAT in the UK, but the government plans to include other charges as time passes. The authorities are planning to digitise the entire system to make all procedures effective, efficient, and easy. Avoidable mistakes cost the Exchequer more than £9 billion a year, and an electronic method aims to be the solution to the problem.

This blog post only covers part of the picture. For more detail, please refer to the HMRC’s comprehensive article.

While VAT4U doesn’t focus on online filing of VAT returns, we can help your business reclaim value-added taxes paid on business expenses like corporate travel. See how our service works and try it out for free.

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