What is Making Tax Digital?
MTD has four key principles:
Better use of information: With MTD, customers will be able to access and edit information that HMRC holds about them.
Tax in real time: As opposed to waiting until the end of each tax year to find out how much you owe, MTD will enable businesses to keep on top of their tax in real-time to increase efficiency and minimise errors.
A single financial account: The goal is that, by 2020, customers will be able to see a single comprehensive picture of their accounts for the first time.
Interacting digitally with customers: HMRC’s systems will digitally connect to customers' software to link HMRC more closely with the customer.
What is the threshold for MTD?
If you have a VAT-registered company with a taxable turnover of £85,000 or more, you will be required to adhere to the MTD initiative. Key things you will need to do from 1st April are:
Keep a digital copy of your VAT business records
Use MTD-compatible software to send tax returns
If, after the 1st April, your taxable turnover drops to less than £85,000, it will still be compulsory for you to do this. However, if you de-register from VAT after 1st April, this obligation won’t apply to you.
Companies under the £85,000 threshold can also sign up for MTD voluntarily.
How will MTD affect my business?
Firstly, you will be required to make quarterly returns as opposed to annual returns. However, as the goal is for businesses to be able to file taxes in real-time, this should be easily calculated.
Secondly, you will have a fully digital tax account thanks to the requirement to use specialised accounting software to store all of your records. You will be able to access this in ‘real-time’ to make more accurate projections.
Thirdly, as mentioned, you will be required to ensure you have MTD compatible accounting software ready to go from 1st April*.
*If your business has complex requirements, particularly if you're a trust or a not for profit organisation, you may be able to defer mandation for 6 months, giving you an extra grace period to become compliant. HMRC are granting this time extension to a small minority of businesses to enable them time to test the service. Contact HMRC if you have any doubts about your requirements.
What do you need to do to be ready?
To be ready, you will need specific accounting software that is compatible with MTD. This software will keep your digital records and exchange data with HMRC.
If you don't currently use software for your taxes, or your software is not MTD compatible or store it digitally, you will be required to make some changes, so you adhere to the new regulations. Investment into either bridging solution or specific software.
While specific accounting software can help, an integrated ERP software (such as WinMan) with built-in financial functions can help benefit your business even more, so it’s worth the investment.
You can find out more in the HMRC, 'Making Tax Digital for Business Stakeholder Communications Pack'.