No one can deny that Making Tax Digital, the government’s ongoing scheme to digitise the tax affairs of every individual and business in the country, has true bouncebackability. No matter how many setbacks it faces, it picks itself up, dusts itself off, sticks its chest out, and refuses to give up or get downhearted.
It’s had more sequels than the Police Academy series of films, more relaunches than Channel 5, and more comebacks than the Rolling Stones. OK, I’ll stop now.
But what is Making Tax Digital (at the time of writing, at least), when is it due, and what are we doing to help clients prepare for it?
Making Tax Digital – what is it?
It is a seismic shift in the way that individuals and companies pay tax to HMRC and how they report their financial affairs. When the scheme is fully rolled out, every man, woman, and company in the UK will have their own online digital account. And soon, everything will be on it – income tax, national insurance, corporation tax, and so on.
The original intention was to launch it in April 2018. The idea was that sole traders would use the platform first to pay income tax, national insurance, and VAT. Then, each year thereafter, the system would gradually expand to encompass every type of tax payer and every type of tax.
Pilots for the system were beset with problems. The two major issues were first that the software didn’t work (it attempted to bill trial users for the wrong amount), and second, deafening silence from HMRC on its progress and implementation with tax agents and tax professionals like the team here at Maple Accounting.
Plans were subsequently scaled back. The system will now launch in April 2019 and all VAT-registered businesses (sole traders, partnerships, limited companies, PLCs, public sector organisations, and so on) with a turnover of £85,000 or more must use the Making Tax Digital platform to submit their VAT return and make payment.
You will need to buy compatible or bridging software for your company in order to be able to comply – spreadsheet users please be careful. More on that on the Maple Accounting blog as we have it.
Making Tax Digital – new VAT rules
All your VAT records will now have to be kept in a digital form. Under the current system, you only need to keep the sales invoices you issue and those issued to you to calculate your VAT and submit it.
Now, you’ll need to keep records of all adjustments made together with a record of your expenditure items which are liable for VAT. If your business is subject to “input tax restrictions” (such as you are on the second-hand scheme or you sell a used home in the course of your normal trading), you will have to make each adjustment invoice-by-invoice from next April.
All of your VAT sales must be kept in digital format and you must record sales individually according to whether the sale was made with the standard rate of VAT applied, the reduced rate, the zero-rate, or if it was VAT exempt.
Making Tax Digital – why is this happening?
Politicians and HMRC have been becoming increasingly exercised by the tax gap – the difference between what HMRC believes it will collect in tax and what it actually collects. HMRC are convinced that it is losing over £4bn a year through minor VAT errors and they want the ability to keep a closer eye on taxpayers because of that perceived shortfall.
HMRC have stated that those businesses which include “additional information” along with their VAT return will be less likely to be selected for a VAT inspection.
What worries many accountants is that the mass accumulation of data points that build up over time coupled with increased machine learning and artificial intelligence capabilities will mean that the “additional information” submission which is currently voluntary will suddenly become compulsory. Underpinning this fear is the belief that the old argument – “if you’ve got nothing to hide, you’ve got nothing to be afraid of” – will be used to justify it.
Making Tax Digital – how are we getting clients ready for it?
With less than 11 months to go, there is still a lack of clarity from HMRC about the migration of the VAT system over to Making Tax Digital. We are keeping an eye on the situation for developments.
We’ve been getting ready for Making Tax Digital for years, even through its many changes. When reliable information emerges that we can act on, we will complete our own internal preparation and get on with helping our clients to achieve compliance.
If you’d like to talk to one of our team about Making Tax Digital, please email firstname.lastname@example.org or call our head office 01332 207 336 .