As of 1st April 2019, all VAT registered businesses with a turnover above the VAT threshold of £85,000 have been required to submit digital VAT returns using compatible software (for some businesses with complex VAT reporting the roll-out date has been deferred until October 2019).

This is the first tranche of the Government’s bold plans to make it easier for individuals and businesses to get their tax right and keep on top of their tax reporting, as well as make it easier for HMRC to collect taxes. Once rolled out, Making Tax Digital (MTD) will transform HM Revenue and Customs (HMRC) into a world-leading authority on digital tax.

Colleagues working on Making Tax Digital (MTD) compliance

So, what exactly does this mean for small businesses?

The current MTD obligations for small businesses

The current requirements are thus:

  • Businesses are required to keep digital accounting records (paper records will no longer meet legal requirements under tax legislation)
  • Businesses are required to use a record-keeping software product that is compatible with HMRC’s API (Application Program Interface) in order to submit relevant tax information to HMRC

If your business is VAT-registered you should already have MTD-compatible software in place. HMRC has confirmed that taxpayers who cannot engage digitally will be exempt (this includes certain people with disabilities who are unable to use a computer, and those in remote areas with poor access to broadband).

A government report from 2015 found that 15 per cent of the UK population are digitally excluded.

What does digital tax reporting mean?

Every small business owner and individual taxpayer should now have access to a digital account where they can check their tax records and manage details with HMRC. As MTD gets rolled out you will use compatible software to submit VAT and tax returns (currently just VAT for businesses meeting the criteria).

HMRC have specified that business records don’t all have to be held in one digital place or program, but there does need to be a digital link between programs and the tax reporting program needs to be compatible with HMRC’s API.

If you aren’t already reporting digitally to HMRC, now is the right time to upgrade your accounting systems. OS Accounting are one of many accounting firms helping small businesses to upgrade their software.

Oliver Spevack, chartered accountant at OS Accounting, says many small businesses have out of date software. “If you are using a desktop version of Sage (such as Line 50, or Sage 50 Accounts), Quickbooks desktop or any other older accounting system then it is likely you will need to upgrade or change. Only the latest version of Sage or Quickbooks will file using the new system, and certainly in the case of Sage, you will need to pay monthly to make sure that your software is always up to date.”

How will MTD help my business?

MTD will make tax reporting for businesses and individuals much simpler. HMRC will collect and process information quarterly to prevent tax due or repayments from building up. The system should help to prevent errors and late filing. As the process is bedded in, filing returns will become much easier. Digital accounting software also offers businesses a more efficient tool for maintaining financial records, so there are efficiency savings to be had when businesses upgrade.

MTD will give you a much clearer picture of tax liabilities in real time. It also means you no longer have to wait until the end of the tax year to know how much you owe so you won’t be hit with an annual tax bill. The new MTD process should also cut the risk of penalties for late returns and errors.

Finance team member working on small business taxes

The MTD timeline

From 1st April 2019: mandatory digital VAT reporting by VAT registered businesses and organisations with a turnover above the VAT threshold, including sole traders, partnerships, limited companies, non-UK businesses registered for VAT, trusts and charities.

From October 2019: mandatory digital VAT reporting for all businesses and organisations with a turnover above the VAT threshold that were deferred from the 1st April deadline (those with complex VAT reporting).

From 2021 (at the earliest): mandatory digital reporting for income tax and corporation tax for most businesses and landlords. Digital VAT reporting may also be extended to all VAT registered businesses.

HMRC is currently running a pilot project for sole traders and landlords to file income tax returns.

Can my business leave MTD once it’s registered?

No, you cannot leave the MTD scheme unless your business de-registers for VAT, even if turnover drops below the VAT threshold.

If you have any questions about MTD speak with your accountant or get in touch with HMRC.