What is Making Tax Digital (MTD)?
Making Tax Digital or MTD as it’s known across the industry is going to bring tax in the UK fully online.
Every taxpayer will have access to their own digital account, allowing them to check their records, manage their details and submit their returns more easily than ever.
MTD is designed to make it easier for you and your business to get your Tax right and keep on top of your affairs so you can:
- Reduce the risk of penalties
- Save time
- Reduce any errors
What does MTD mean for VAT?
If you run a VAT-registered business with a taxable turnover of more than £85k, Making Tax Digital for VAT means that you will be expected to keep and submit your VAT returns digitally.
I’m on the Flat Rate Scheme, does MTD apply to me?
If your account for VAT is using the Flat Rate Scheme:
You do not need to keep a digital record of your purchases unless they are capital expenditure goods on which input Tax can be claimed. Some examples below:
- Stationery, consumables and other office suppliers
- Plant or an item of specialist requirement brought in for a job
- Personal Protective Equipment (PPE)
- Materials such as bricks, timber and aggregate
- Vehicle costs including fuel, if you are operating in the transport sector using your own, or leased vehicle
Here is a link to what you can and cannot reclaim: https://www.gov.uk/reclaim-vat
You do not need to keep a digital record of the relevant goods used to determine if you need to apply the limited cost business rate.
If the Tax software you use does not include a Flat Rate Scheme setting and does not allow you to include a rate of VAT other than standard, reduced or zero/exempt, then you will need to record the supply as either one standard-rated supply and one zero-rated supply.
Alternatively, you can record the sale at one rate and correct the VAT through an adjustment at the end of the period, using the same method HMRC will allow you to use to correct the VAT on a mixed supply.
What does MTD mean for Tax?
If you run a business, Making Tax Digital for Tax will apply to you. Most businesses, self-employed taxpayers and landlords will eventually end up paying their Tax digitally.
What does HMRC mean by ‘digital’?
‘Digital’ simply means keeping records in a digital format. Many businesses already do this by using spreadsheets to keep their records. However, you will need to link it with other software.
This could be:
- In a software program
- Computer or tablet
- Smartphone application
The difference under Making Tax Digital is that the software that businesses use must be able to keep and maintain the records outlined in the Regulations
- Preparing your VAT Returns using the information maintained in those digital records
- Communicating with HMRC digitally via their Application Programming Interface (API) platform.
What is a digital link?
HMRC will also accept digital links as:
- Emailing a spreadsheet containing digital records to a Tax agent (such as IN-SYNC) so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation). https://www.gov.uk/guidance/partial-exemption-vat-notice-706
- Transferring a set of digital records onto a portable device
(for example, a pen drive, memory stick, flash drive)
and physically giving this to an agent to import that data into their software
- XML, CSV import and export, and download and upload of the file
- Automated data transfer
- API transfer
This list is not exhaustive.
Note: HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs, to be a digital link.
How does Making Tax digital impact me?
Depending on your situation it means you need to ensure you can record your income and expenses using an approved software solution if you plan to do yourself.
- MTD currently only involves businesses and the self-employed who are above the VAT income threshold of £85,000.
- The rest of the roll-out will continue with businesses and self-employed registered for Corporation Tax reporting digitally from 2020.
IN-SYNC can help to make sure you’re ready to Make Tax Digital.
Can I still use an agent or an accountant with the introduction of Making Tax Digital?
If you get help from a third party (for example a book keeper, agent (agent is generally an Accountant), friend or family member or IN-SYNC to meet your obligations for Making Tax Digital, you will need:
- Full access to your digital business records - so you’ll need to be happy that your information is secure
- To keep your digital business records and then electronically extract the data and send it to them by electronic means - for example by using a pen drive or emailing a file.
You may authorise HMRC to receive data from (and send data to) an agent on your behalf.
Once you have done this, the agent can sign up your business to that service and use software to create, view, edit and send your data to HMRC.
Notes for you:
- Your agent may also keep and maintain digital records on your behalf. If you have previously authorised HMRC to receive your VAT Return from an agent they can still do this.
- You will be able to have more than one agent if you wish, performing different Making Tax Digital services for you, and you will be able to manage different levels of permission for each of them.
- Agents will need to sign up to a ‘new agent services account’ to use Making Tax Digital services on behalf of their clients. The agent must have software of their own or have access to the software that holds your digital records.
- Agents will not necessarily have access to all of your source data so, for example, they may not always be able to make corrections to your digital records. In these circumstances, your agent will need to advise you of any corrections required to those digital records.
- HMRC will provide access to taxpayer information we hold, and the necessary services, only to those agents who have been properly authorised.
- IN-SYNC are authorised by HMRC and would be happy to discuss how we can help you can become MTD ready and compliant.
Do I need to keep my records digitally?
The records listed below must be kept, maintained and kept up to date in a digital form.
The regulations refer to this information as your ‘electronic account’. The exact way you must enter the information will depend on the software package you have.
Contact your software provider if you are unsure how to enter information into your software. HMRC can only provide advice on the legal requirements of Making Tax Digital.
You will need to keep additional records, such as your invoices. You do not have to keep these digitally, but you may choose to do so.
You must have a digital record of:
- Your business name
- The address of your principal place of business
- Your VAT registration number
- Any VAT accounting schemes that you use
For each supply you make you must record the:
- Time of supply - the Tax point
- Value of the supply - the net value excluding VAT
- Rate of VAT charged
For each supply you receive you must record the:
- Time of supply (Tax point)
- Value of the supply
- Amount of input Tax that you will claim
There is no requirement under the regulations to record inputs for the period split by VAT rate.
The time of supply is typically the date on the VAT invoice or, if you are on cash accounting, when you pay for the supply. However, you must also hold the evidence to claim a deduction of input Tax.
If more than one supplier is on an invoice, you can record the totals from the invoice.
Where the amount of input Tax that you will claim is not known at the time you record the supply you have received, you can record:
- The total amount of VAT and adjust for any VAT you cannot recover once calculated
- No VAT and adjust for any recoverable VAT once calculated
- VAT recoverable based on an estimated percentage and adjust for any VAT once calculated
Summary data required
To support each VAT Return you make, your compatible software must contain:
- The total output Tax you owe on sales
- The total Tax you owe on acquisitions from other EU member states
- The total Tax you are required to pay on behalf of your supplier under a reverse charge procedure
- The total input Tax you are entitled to claim on business purchases
- The total input Tax allowable on acquisitions from other EU member states
- The total Tax that needs to be paid or you are entitled to reclaim following a correction or error adjustment, and any other adjustment allowed or required by VAT rules