There are less than six months until the first phase of the government’s scheme to modernise the tax system comes into effect.

After almost four years of updates, reports, and political wrangling, Making Tax Digital (MTD) for VAT will officially go live on the 1st of April 2019.

MTD – What you need to know

The first stage of Making Tax Digital will apply to all VAT-registered businesses whose taxable turnover exceeds the VAT threshold of £85,000 per annum.

Regardless of company status or sector, these firms will be required to both keep digital records of their accounts and to submit their VAT returns to HMRC via compatible MTD software. 

Paper files and the Government Gateway for VAT will no longer meet the legal requirements for VAT following the 1st April – meaning businesses are running out of time to take their record-keeping digital.

HMRC is working alongside a wide range of software developers and suppliers to produce dedicated MTD software for businesses and accountants.

Voluntary VAT-registered businesses also have the option to take part in MTD, but they will not be legally required to.

All businesses over the VAT threshold will need to report their VAT under the new system, even if their taxable turnover temporarily falls under £85,000. If this happens, and they wish to drop out of MTD, they will need to deregister for VAT.

MTD – Deferred dates

The original Making Tax Digital Roadmap was first published in 2015, following the scheme’s proposal in the Autumn Budget. While the start date MTD for income tax was initially April 2018, this was pushed back to 2020 at the earliest; giving landlords and SMEs more time to familiarise themselves with digital record keeping and choose the right software for them.

At the time of the deferral, the president of the Chartered Institute of Taxation, John Preston, said: “Whilst we are supportive of the government’s long term ambitions for digitalising the tax system, we have always called for this to be achieved in a measured and manageable way.

“This deferral will give much more time for businesses, supported by their advisers, to identify for themselves, at their own pace, the benefits of digital record keeping.”

More recently, HMRC published an update for MTD confirming that a “small minority” of VAT-registered companies with more complex tax requirements will be given an additional six months to prepare for the changeover.

The deferral applies to companies in the following categories:

  • Trusts
  • ‘Not for profit” organisations that are not set up as a company
  • VAT divisions
  • VAT groups
  • Public sector entities required to provide additional information in their VAT returns (such as NHS Trusts and government departments)
  • Local authorities
  • Public corporations
  • Traders based overseas
  • Those that make payments on account
  • Annual accounting scheme users

It is estimated that this deferral will only apply to 3.5% of businesses in the UK. While these eligible firms will welcome the delayed deadline, many believe HMRC should have also extended the date for general SMEs.

MTD – Early onboarding

Thousands of businesses across the UK have already registered to take part in HMRC’s pilot for online VAT.

HMRC have said that half a million companies will be involved, but estimates that over a million VAT-registered businesses will need to be using the MTD software from next April.

The very first pilot for MTD took place earlier this year for a select few invited businesses. After “successfully” testing the software and new processes, HMRC has opened up the secondary pilot to sole traders and limited companies registered for VAT.

Financial secretary to the Treasury, Mel Stride, has said that “more and more businesses use digital tools every day to help them operate – tax shouldn’t be different. This is a major step towards bringing VAT into the 21st century.”

The public testing phase is now available for early onboarding for businesses that wish to sign up. Participants will need to keep a digital record of all of their VAT transactions, then file their VAT returns using API enabled, MTD software.

MTD – Next steps

Making Tax Digital isn’t just for VAT – HMRC plans to make the vast majority of tax recording and processing activities digital over the next few years.

Once MTD for VAT has been successfully implemented, MTD for income tax is expected to follow on April 2020 at the earliest. This will apply to self-employed workers and landlords who receive an income from their properties as well as partnerships and trusts.

HMRC are yet to set an annual turnover threshold for MTD for income tax, however it was suggested in the consultation process that this would be around £10,000. Those below the threshold will be exempt from the process.

A pilot for the income tax scheme was started back in April 2017 and became public earlier this year. Sole traders with income from a single business and those profiting from letting UK properties are now able to join up to the testing phase if they wish; keeping business records digitally and sending quarterly income tax updates to HMRC.

The introduction date for MTD for corporation tax is also yet to be confirmed, but this has also been deferred to at least April 2020.

MTD – Time is running out

Making Tax Digital is expected to streamline the tax process; simplifying reporting and reducing the number of errors made to close the tax gap.

However, if they haven’t already, businesses in the UK will need to make preparations quickly to avoid potential fines when the legislation comes into effect.

With so little time until MTD for VAT officially begins, concerns have been raised over how few companies have started to digitise their tax processes and upgrade their software and systems.

The latest survey from accountancy network Moore Stephens has revealed that as many as 37% of UK businesses are still unfamiliar with the Making Tax Digital scheme.

A further 64% said they are not prepared for the 2019 deadline, and 48% have no plans in place at all to prepare for the switch to digital.

Talk to the experts

The change to the tax system is inevitable. As even more areas of tax become digitised over the next few years, it is absolutely essential that your business is prepared.

For further information on how MTD will impact on your business and what you need to do, talk to the Financial Management Centre today. Our team of expert consultants can help you put together a complete and effective Making Tax Digital plan for you company. Please call us today on 0800 470 4820.

John Stolliday
John Stolliday

John Stolliday runs The Financial Management Centre in Luton East. John is a qualified accountant (FCCA) and bookkeeper (MICB) with UK and Middle East experience in the construction and building services sectors, handling company turnovers up to £100m and staff of 15. John has held senior roles, up to board level, in civil engineering, industrial engineering, pipelines, general building and building maintenance companies.