With modern technology, many everyday activities are now digital, and the job of tax administration is certainly no stranger to this advancement. Many businesses will now be familiar with Making Tax Digital (MTD), but how exactly does it impact your business?
What is Making Tax Digital?
Making Tax Digital is a government initiative. It has the ambition of HMRC becoming one of the most digitally advanced tax administrations in the world. Many businesses are already obliged to utilise Making Tax Digital to deal with VAT, which was introduced in April 2019. For other businesses and for Income tax and corporation tax, the introduction of Making Tax Digital has been delayed. With this in mind, we look at what changes to expect in 2020 for Making Tax Digital..
Making Tax Digital for VAT
If you’re a VAT registered business, then Making Tax Digital regulations are likely to already apply to you. Since April 2019 (or October 2019, for those companies that were eligible to defer for six months), it has been a requirement for the majority of VAT-registered businesses with taxable turnover above the VAT threshold (currently £85,000) to keep digital records and send digital VAT returns.
If your VAT-registered business has a taxable turnover below the VAT threshold, you can still sign up to Making Tax Digital.
April 2020 changes
A handful of changes will take effect in April 2020, which will apply to those businesses that were obliged to register for Making Tax Digital in April 2019.
One of these key changes taking place in April 2020 is the end of the soft landing, relating to putting in place digital links across MTD software to meet the MTD for VAT requirements. Businesses will now be required to have digital links between software programs.
Digital recordkeeping is another change, that is more likely to impact the smaller businesses that are registered for Making Tax Digital. A key change obliges these businesses to digitalise recording of supplies received and made, including time of supply, value and VAT rate. This extends to purchases, stocks and fixed asset transactions. This may involve investment in purchasing software packages, which will need to be Making Tax Digital Compliant for filing.
October 2020 Changes
For any company that deferred Making Tax Digital for six month until October 2019, the above April 2020 changes will apply from 1 October 2020 to these companies.
Extra time to comply with Making Tax Digital
It was announced in October 2019 that certain businesses can now receive additional time to comply with the requirements of Making Tax Digital. Extra time is available to businesses with complex or legacy IT systems that could need a longer time period for implementing digital links in their MTD software to meet VAT requirements. This is in addition to the one-year soft-landing period already provided, which sets deadlines of April 2020, (or October 2020 for deferred businesses). Businesses will have to apply for this as a specific direction to HMRC and meet the criteria, cost alone is not a sufficient reason.
To be considered for such an extension, a formal application to HMRC is required as soon as possible and no later than the end of your soft landing period, outlining why it is unachievable and not reasonable for your business to have digital links in place by the Making Tax Digital VAT digital links mandation date. You will also need to submit further details of your system, and a clear timeframe of when you will become fully MTD compliant (typically no later than one year from the end of their soft landing period) together with a statement outlining the controls you will put in place to ensure any manually transferred data is moved accurately and without error.
Making Tax Digital for Income Tax
For all other forms of tax, there is currently a Making Tax Digital delay. HMRC has confirmed that in order to allow for delivering EU exit responsibilities, it was slowing the IT delivery of certain elements of Making Tax Digital relating to income tax and corporation tax, until at least 2021. You can still sign up for a digital tax returns pilot scheme before this date if you are self-employed or a landlord.
Making Tax Digital for Corporation Tax
As outlined above, Making Tax Digital for Corporation Tax has now been delayed until at least 2021, as the government focuses its efforts on exiting the European Union in 2020.
Making Tax Digital Software
When it comes to the process of making a digital income tax, you will need to use compatible software. Technically speaking, the product that you use to submit digital tax returns needs to be compatible with HMRC. HMRC has a list of compatible software, and this includes Quickbooks, Xero and bridging software from Excel. As outlined above, when April comes, HMRC wants data to be exchanged digitally between applications.
A smooth transition to Making Tax Digital
At Alexander and Co, our experienced team of Making Tax Digital accountants can help to get your business accounts ready for the digital switch, as well as providing you the necessary tax advice to support your Making Tax Digital transition.
Our specialists know all about the Making Tax Digital Scheme and can help you to navigate the new software and to submit your tax returns online. For any enquiries, fill in our quick online enquiry form or call us on 0161 832 4841.