What is Making Tax Digital?

What is Making Tax Digital?

7 min read

HMRC’s new Making Tax Digital (MTD) regulation is the biggest shake-up of tax laws in a generation, bringing tax into the digital age.

It all kicked off with VAT in April 2019. VAT-registered businesses are now all required to keep electronic records of their transactions. Just so you know, it doesn’t stop at VAT - income tax and corporation tax will soon follow, but that’s another can of worms…

Let’s concentrate here on what MTD means for VAT.

"Under MTD you must keep all your VAT records in a digital format and submit the VAT return through MTD-compliant software."

Click to tweet

So what’s changed with MTD for VAT?

Here, Accountingweb’s Rebecca Cave spells out what MTD for VAT means for you right now.

If your business is VAT registered and your annual turnover is at least £85,000, HMRC will have been in touch about submitting VAT returns under the MTD rules. These rules apply to VAT periods beginning on and after 1 April 2019.

Small businesses that are VAT registered, but whose turnover for the year to 31 March 2019 was less than £85,000 (the registration threshold), aren’t required to be part of MTD at this stage, but they can join on a voluntary basis by getting in touch with HMRC.

If you’re VAT registered but have a low turnover and decide not to opt into MTD, you’ll need to keep an eye on your turnover for each 12-month period. If this total exceeds £85,000 you’ll have to join MTD from the start of your next VAT period.

It’s all about efficiency

Under MTD you must keep all your VAT records in a digital format. You also have to submit your VAT return digitally, through MTD-compliant software. Note, the online VAT return form on gov.uk is now closed to all businesses which have to comply with the new MTD rules.

The point is that HMRC want to reduce human error - digital tax means no more manual data entry when submitting VAT forms.

VAT registered businesses that fall outside the scope of MTD can carry on submitting VAT returns as they do now, using the online VAT return form on gov.uk.

You can read more about MTD VAT returns here.

"You will be responsible for keeping your business records in a digital form."

Click to tweet

What stays the same?

The VAT return is due on the same day. For quarterly returns this is seven days after the end of the month that follows the end of the VAT quarter.

The VAT due is payable as it is now – by electronic transfer, BACS, direct debit or at a bank. Businesses using the VAT annual accounting scheme, or who make payments on account to HMRC, will generally pay the VAT due by standing order.

What about digital records and MTD?

You’re responsible for keeping your business records in a digital form. This means recording at least these data points electronically for each transaction:

Sales Purchases
Time of sale (tax point) Time of purchase (tax point)
Value excluding VAT Value net of VAT
Rate of VAT charged Amount of VAT to reclaim

HMRC also require you to record the following information digitally so it knows where the VAT return has come from:

  • Your business name.
  • Your business address, or principal business address.
  • VAT registration number.
  • Any VAT accounting schemes that you use.

"If you’re an active QuickBooks user then it’s good news. You already manage transactions digitally so you won’t notice much of a change."

Click to tweet

What about retail VAT?

Shops that use a VAT retail scheme can keep digital records of gross daily takings, and won’t have to record each sale separately. If a purchase invoice includes more than one item and all the items are charged at the same VAT rate, the invoice can be treated as a single entry. You’ll also want to record some additional information for credit control or accounting purposes, such as the name of the customer or supplier, and when the sale/purchase was paid for.

You don’t have to take a picture of each purchase receipt and sales invoice — recording the required data in a computer-based accounting system or on a spreadsheet will be sufficient. As long as the VAT data can be transferred from the accounting system or spreadsheet via a digital link to MTD-compliant software, which submits the VAT return to HMRC, you’re meeting MTD requirements.

The digital link can be as simple as sending the spreadsheet with completed VAT figures to your accountant by email or on a data stick, so the VAT data can be imported into the accountant’s MTD-enabled software. A simpler solution is to use a single software solution to record your VAT data, which also submits the VAT return to HMRC and is accessible by your accountant.

What does digital tax mean for me?

You need to be prepared. QuickBooks surveyed small businesses in March 2019 and found that only 25% had already taken all the necessary steps to becoming MTD compliant. An alarming number, but that’s changing fast as the rules come into force. And although it’s clear the transition to digital might be a little bumpy, it’s a huge opportunity to streamline operations and increase efficiency.

If you’re an active QuickBooks accounting software user then it’s good news. You already manage transactions digitally so you won’t notice much change. Here’s why:

  • For MTD you need to record all your transactions in “functional compatible software”. QuickBooks meets this requirement as it can connect directly to HMRC.
  • QuickBooks also captures all the information that HMRC asks for under MTD. So long as you keep using QuickBooks to manage your books, you’re compliant with MTD.

QuickBooks has been approved by HMRC as having passed the VAT test environment for MTD, so it can safely be used to submit VAT returns directly to HMRC.

But Excel really works for me…

That’s fine. It’s actually still possible to continue using Excel, thanks to Making Tax Digital (MTD) bridging software. You just save all your documents as usual in spreadsheets such as Excel, then use bridging software to submit your return to HMRC.

Bridging software is included as part of the QuickBooks Online software package. If you choose this option, it simply pulls in the data from your chosen spreadsheet when you’re ready to go.

MTD doesn’t stop at VAT

Far from it, VAT is just the start. Other taxes will also be affected by MTD, although not until April 2020 at the earliest. The government haven’t yet specified exact dates for compliance, but this is a rough guide of what to expect:

  • Making Tax Digital will not be mandated for taxes other than VAT until April 2020 at the earliest.
  • If you’re an unincorporated landlord or small business with an annual turnover between £10,000-£85,000, you’ll be among the first to join MTD, from April 2020.
  • MTD for income tax will be mandatory from 2021 at the earliest. When the government decides on a date, MTD compliant income tax returns will become mandatory from the start of the first accounting period in that tax year.
  • Corporation tax is likely to be MTD-compliant at the same time as income tax (2021).

Need help?

HMRC know the switch to digital isn’t easy for everybody. If you’re not sure what to do, there’s help and support for MTD available. The ICAEW also have some useful advice on MTD and your business.

Or you can call the QuickBooks MTD advice line on 0808 168 4248.

Wouldn’t it be easier to use an accountant?

If the process of going digital seems just too complicated, it makes absolute sense to enlist the help of an accountant. This will take all the stress off you – you won’t have to worry about getting things wrong the first time you file under MTD.

Not only that, there’s a great deal more an accountant has to offer – in terms of useful advice on how to run your business smoothly, and help it grow. Just make sure you choose a professional who’s completely up-to-date and is using cloud-based solutions such as QuickBooks.

Looking ahead

You can rest assured that QuickBooks are ahead of the game and have solutions for you and your business, in readiness for Making Tax Digital. We’re here to help you along the MTD journey.

Did you find this article about what is Making Tax Digital useful? The QuickBooks Blog covers many more topics. It’s all part of the support we offer to small businesses in the UK.

Learn how QuickBooks can help you with Making Tax Digital

Editor’s note: We first published this article in January 2019 and we have updated it for relevance.

You may also enjoy reading