Blog: Your last chance to get MTD-compliant
We’re now several years into the rollout of Making Tax Digital, an HMRC-led initiative designed to move the administration of tax responsibilities to digital.
The first phase of the changes required VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 to keep digital records and use software to submit VAT returns.
Companies below that £85,000 threshold have been able to voluntarily join the Making Tax Digital service, but that’s all set to change next month.
From April 2022, all VAT-registered businesses will be required to follow MTD rules for their first tax return starting on or after that date. That means sourcing appropriate software, registering for the online VAT service, and ensuring records are kept digitally – and are linked when multiple systems are used.
There are also new penalties for those who don’t comply, affecting VAT customers for accounting periods beginning on or after 1 January 2023.
Following MTD guidelines essentially means signing up for MTD for VAT which you can do online or through your agent/accountant, and keeping records digitally. These records include:
- your business name, address and VAT registration number
- any VAT accounting schemes you use
- the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
- the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
- any adjustments you make to a return
- the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
- the rate of VAT charged on goods and services you supply
- reverse charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy
- your total daily gross takings if you use a retail scheme
- items you can reclaim VAT on if you use the Flat Rate Scheme
- your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme
You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:
- volunteers for charity fundraising
- a third party business
- employees for expenses in petty cash
You must add all your transactions to your digital records, but you do not need to scan paper records like invoices or receipts.
How to record things digitally
You need to use a compatible software package or other software (like spreadsheets) that connects to HMRC systems. Records kept across multiple packages must be linked to be MTD compliant, so if you currently use one system for record-keeping and another for submission, you may need to make some changes there, too.
When to sign up
All VAT-registered businesses, regardless of turnover, must be signed up to the Making Tax Digital service and follow MTD rules for their first tax return starting on or after 1st April 2022.
Be mindful not to sign up to MTD too close to the date of your return or your direct debit payment to avoid duplicate payment issues, though. HMRC recommends you avoid signing up seven days before your return is due or five days after it’s due, and to do so at least three days before any direct debit is to be taken.
From January 2023, Making Tax Digital related penalties will become part of HMRC’s new points-based system for late submissions and payments.
The new penalty system means:
- Businesses will receive one point for each submission deadline that they miss
- A financial penalty of £200 will be payable once points exceed a particular threshold. (Businesses filing quarterly returns, applicable to both VAT and MTD for ITSA, have a threshold of four points)
- Once the threshold has been breached, businesses will incur further penalties for additional failures to make submissions on time, but points won’t increase
- Points will expire after two years, but will remain in place when businesses are at the threshold to ensure there is a period of compliance before any points are reset
You can apply for an exemption if it’s not reasonable or practical for you to use computers, software, or the internet to follow the rules for Making Tax Digital for VAT.
This could be because:
- of your age, a disability or where you live
- you object to using computers on religious grounds
- of any other reason why it’s not reasonable or practical
HMRC will consider each application on a case-by-case basis.
Making Tax Digital for VAT is the first phase of plans designed to make HMRC one of the most digitally advanced tax administrations in the world. In the next few years, MTD for Income Tax will come into force, and further consultations and roll-outs should be expected.
MTD for Income Tax
Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6 April 2024.
MTD for Corporation Tax
The government has published a consultation on the future design of Making Tax Digital for Corporation Tax and will provide businesses with an opportunity to take part in a pilot for Making Tax Digital for Corporation Tax. It’s said it won’t and will not mandate its usage before 2026.
Help is available
Making Tax Digital doesn’t have to be overwhelming when you get the right advice.
We’ve been helping SMEs prepare for MTD changes since the beginning and we’re happy to lend a hand, just get in touch.Help with MTD