A company’s guide to Making Tax Digital

HMRC is intent on becoming one of the most digitally advanced tax administrations in the world, and Making Tax Digital (MTD) is key to this goal. Your business will eventually have to get to grips with MTD, though not as early as previously expected due to some recent revisions.

Changes have been delayed by a re-evaluation of the timing and extent of the reforms. Here we explain what MTD is, where we are now, and how it might affect your business.

What is Making Tax Digital (MTD)?

Originally announced in the March 2015 Budget, MTD was introduced with the objective of moving businesses – excluding multinationals – and individuals into personalised digital tax accounts by 2020.

Businesses will have to maintain records of income and expenditure online and file summary updates to HMRC on a quarterly basis, in addition to an annual statement. In return, HMRC claims MTD will:

• Provide users with a real-time view of their tax liabilities
• Provide users with access to all of the information held by the taxman
• Ultimately signal the end of the self-assessment tax return

HMRC also believes the system will help prevent mistakes, and recoup some of the £8bn it claims it loses each year to avoidable taxpayer errors in the process.

Why was the MTD draft legislation withdrawn?

Following six consultations, MTD was included within the original draft legislation for the 2017 Finance Bill. It was due to apply to businesses who made at least £10,000 in revenues each year, with income tax and National Insurance Contributions (NICs) to be reported digitally in April 2018, followed by VAT and corporation tax in 2019 and 2020 respectively.

However, there was opposition to the changes from the accounting spectrum and Parliament, specifically regarding the strain it would place small businesses under. In March 2017, the Finance Bill Sub-Committee published a report calling for a delay of the tax reforms.

The changes were withdrawn from the Finance Bill prior to the General Election, and in July 2017 it was announced that HMRC had amended the timetable and scope of MTD.

MTD – what changes have been made?

Acting on the Finance Bill Sub-Committee’s recommendations, HMRC announced some significant changes to the MTD regime in July. Firstly, only businesses that meet the £85,000 VAT threshold will be obliged to keep digital records. Smaller firms can decide whether or not to follow suit.

It has also amended its timetable to help ensure a smoother transition for companies whilst easing the demands placed on smaller businesses.

To begin with, businesses will only be required to use MTD for VAT purposes. This will be mandatory from April 2019. Businesses won’t have to adopt MTD for other taxes until April 2020 at the earliest, and only once the system has been proven successful. The updated revisions are set to feature in the Summer Finance Bill.

How might MTD affect your business?

Due to the fact that smaller firms are no longer compelled to adopt MTD, it could be that MTD doesn’t impinge on your organisation at all.

Once the regime is in full flow, HMRC forecasts that by 2021/22 the changes will result in a net administrative burden saving of £100m for businesses. However, before the benefits become apparent, the transition phase will be challenging.

Pressure has been eased by the decision to initially only apply MTD to VAT, which most businesses already report quarterly online. Nonetheless, there are potential transitional costs for businesses to beware of, including time spent familiarising themselves with the software and processes, and purchasing new apps and potentially new hardware.

HMRC originally evaluated the initial cost to businesses at £280 each on average, but the Finance Bill Sub-Committee claimed this was an underestimation.

What does quarterly reporting mean for my business?

The benefits of MTD are evident. But whilst HMRC insists that it will make for a more transparent and efficient tax system, the regime is clearly more onerous for businesses and accountants.

MTD users will eventually have to complete quarterly submissions each year, in addition to a finalisation submission following year-end adjustments. As well as leading to additional accountancy support, is also likely to increase costs for tax and regulatory compliance.

You need to guarantee streamlined processes between your business and your accountant. Those who already have many automated and more transparent processes in place will typically find it easier to make a success of MTD without investing too much time and effort. Sublime Accounting already uses cloud accounting software to maintain records digitally for its clients, so if you need assist in meeting your MTD requirements we can advise on transferring to the cloud.