Making tax digital – the next stages
VAT-REGISTERED BUSINESSES in the UK now face additional Making Tax Digital obligations. These obligations were meant to be introduced on April 1, 2021 but were postponed due to coronavirus. From April 2022, all VAT returns will need to be filed using MTD compliant software, even for companies whose turnover is below the VAT threshold (£85,000).
Digital links are now required, which means the final VAT return figures must also have a digital link back to documents used for record keeping. Those businesses which use bespoke, legacy or specialist software could find this transition difficult given the requirement to digitally link the software rather than manually entering the information.
This is likely to lead a significant number of businesses to switch their record keeping from being Excel based to the use of accounting software such as Xero or Sage which are MTD compliant. HMRC does recognise that certain calculations, for example capital goods scheme (CGS) adjustments, may need to be performed outside software and then manually entered into the VAT return software.
Business can apply for an exemption if it is not possible to comply with the regulations but in order to do this they must include a comprehensive plan to resolve the issue and the exemption is likely to be granted only if there are significant blocks to implementing digitally linked software.
HMRC has also stated that from April 1, 2021 there will be penalties for not keeping digital records and these will be based on the standard VAT penalty regime.
Going forward HMRC is planning to introduce MTD for income tax (from April 2023) and a consultation was published in November 2020 confirming that MTD will be coming to corporation tax, though not before 2026.
This will most likely mean that all companies will have to maintain digital records of their income and expenditure and provide quarterly
updates of income and expenditure using MTD compliant software.
There might therefore be difficulty for businesses whose VAT quarter isn’t co-terminous with their financial quarter, as they could have eight quarterly returns to file each year.
From April 2023 self-employed
business and landlords with turnover above £10,000 will have to report under MTD.
The filing requirements for nonVAT-registered businesses are likely to increase significantly, with proposals being made for four in-year reports within one quarter of the business end and a fifth end-of-period statement.
This is likely to lead to a significant increase in work for both individuals and their accountants to ensure all records are kept up to date on a quarterly basis rather than the current annual requirement.
The MTD changes being both implemented and proposed, although likely to increase the workload of accountants, will also hopefully ensure greater levels of compliance with tax legislation, due to the requirement for the digital maintenance of records, which should enable HMRC to better identify cases of fraud and error within filings for VAT, corporation tax and income tax.
We are seeing a lot of clients moving over to cloud-based accounting software that both enables them to be MTD compliant and also allows for remote access, given the increased demand for home-working either part or full time as a result of the pandemic.
If you require assistance with ensuring compliance with MTD, please get in touch.
There will be penalties for not keeping digital records’