Posted 16th March

Time to prepare: Making Tax Digital is coming

16th March 2019 - 11:04am

Featured in ek&bbusiness magazine; Issue 157 (Subscribe)
Words Adam Bernstein
Artwork Laura Robertson

With Making Tax Digital – MTD – changing the way HMRC and tax payers work with each other, we find out how best to prepare your business in time

A new tax regime has been rattling around Whitehall for some three years and the first element will be in place from April 2019. Called Making Tax Digital – MTD – it’s designed to change how HMRC interacts with taxpayers and how they report their profits.

The change is not related to Brexit, but it will be compulsory and will change how businesses record and report every individual transaction they make. It really is the biggest change to come out of the bowels of HMRC in years and it’s going to make life for businesses markedly more complex.

HMRC’s thinking
HMRC reckons that once the initial headache of setting up MTD has passed, and taxpayers are digitally recording their income and expenses, costs for all should be lowered while at the same time reducing any errors that come from the present – mismatched and partly paper-based – system. Of course, the ideal of a central repository for all taxpayer information is attractive but it’s riddled with the potential for error, added to which taxpayers need to be able to get to grips with MTD.

While HMRC has used the tagline that ‘tax doesn’t have to be taxing’, the reality may be somewhat different. And with the complexities of modern life, a huge tax code, and the enormity of the task of setting up the new regime, the risk of failure is high.

But what KBB companies – and everyone else for that matter – will be facing isn’t what HMRC originally envisaged; Brexit and the snap general election in 2017 has taken up most of the resource within government and by extension, HMRC.

The result is that the initial plans to force businesses to keep their records digitally from 2018 were abandoned. Now most of MTD has been scaled back so that from next April HMRC will apply MTD only to VAT where businesses are above the VAT threshold of £85,000. Even so, they will have much to worry about from next April.

Income and Corporation Tax haven’t been abandoned – just postponed until April 2020 at the earliest. For the moment, taxpayers have breathing space because, and this is the concern for many, they’d have had to report quarterly on their income for Income Tax and Corporation Tax purposes, with a balancing report at the end of each tax year. The proposal for this level of reporting went down badly with everyone apart from HMRC seeing extra cost.

The task
Those firms who are VAT registered – which will undoubtedly include every KBB company – need to start preparing and taking advice now. Why? Because under MTD, the online reporting of VAT will change; the present online portal will close, and VAT-registered businesses will be compelled to use dedicated software to generate and submit their VAT return.

Apart from the online reporting process, there’s a much bigger change that companies will have to grapple with, and to some it’ll appear very invasive as HMRC will determine how a business is run and how its records are kept. Presently, VAT-registered businesses hold data in a form of their choosing before using it to generate the reports that drive the filling in, and submission, of a VAT return, albeit in a digital form. This allows firms to be in control. But under MTD, the rules will specify not just how the information is submitted to HMRC, but how it’s worked out and the electronic format the data is held in.

Quite simply, each and every transaction will have to be recorded electronically, and those records will automatically drive the VAT return calculation. Firms will have to use an approved accounting package or a spreadsheet with additional software. Overall, taxpayers will need to be able to work with technology or have an accountant who is prepared to help.

Most KBB companies operate above the VAT threshold so the option to stay unregistered for VAT (and therefore outside of MTD) won’t apply. It’s going to mean much more work.

It is possible to be exempted from MTD if the business qualifies for one of the existing exemptions from online filing on the basis of digital exclusion or on grounds of religious belief. Based on the current position, taxpayers will not get religious exemption by telling HMRC that they’re a member of a tiny sect that shuns technology. The bar to clear is incredibly high and involves proving that the individual’s entire life revolves around their beliefs.

Digital exclusion will be a slightly easier route. It can be applied for where a business cannot use a computer to meet HMRC’s requirements or it doesn’t have a reliable internet connection at the place of business. It’s worth pointing out that historically HMRC has taken a firm view and effectively told businesses to get their accountant to fulfil the digital obligations. But with MTD the process involves cost – filing the nine figures of a VAT return isn’t expensive, but the extra cost of maintaining the digital record of every single transaction for MTD will be.

It’s quite possible that the Tax Tribunals could consider the cost on a business of complying with MTD so great that it could be grounds for exemption if it’s disproportionately high. However, for this exemption to apply, everyone in control of the business must be ‘digitally excluded’. That’s easy for a sole trader, but in a partnership or company everyone at the top must be unable to file.

The advice to those who think they might be exempted is to start gathering evidence. Once HMRC is accepting applications for exemption, it’s suggested that taxpayers get in early taking advice from an accountant so that the application is correctly worded. And if rejected – appeal. Don’t ignore MTD as it’s not going away.

Read more about MTD on by searching for VAT Notice 700/22


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