Avoidable tax filing errors cost the Government an estimated £9 billion a year. To counter these easily-avoided errors, HMRC are introducing the Making Tax Digital (MTD) scheme.
The MTD regulations will mean that, eventually, most businesses in the UK will need to keep digital records and submit tax returns via accounting software to HMRC.
As with anything new, there are lots of questions – especially as the scheme rollout is staggered over the next few years. To help you understand how MTD affects your current, and future, business operations, we’ve compiled this list of commonly asked questions about the scheme.
Making Tax Digital: Your Burning Questions Answered
From knowing if your business needs to file quarterly tax returns to understanding which software to choose, these questions will provide the essential answers.
1. What Does MTD Really Mean?
Making Tax Digital was introduced to reduce the number of errors made on tax returns. The intention is to bring tax filing and bookkeeping up-to-speed with the digital age.
In reality, this means that all businesses under the MTD scheme must digitise all records for tax purposes. This includes receipts, invoices, and payments.
Returns are no longer filed via the HMRC website or on paper. Instead, businesses must use a third party software application to keep records and submit returns.
2. What is Digital Bookkeeping?
Instead of keeping paper receipts tucked in a shoebox somewhere, or handwriting invoices for customers, you now need to store all records digitally.
This includes the digital storage of paper-based record keeping. There are apps, for example, that allow you to take a photo of a receipt to store it in a ‘digital shoebox’. This counts as digital record keeping.
3. Does MTD Apply to My Business?
As of 1st April 2019, businesses with a turnover above the £85,000 VAT threshold must be compliant with MTD.
At present, only VAT returns must be submitted digitally. Income tax will be introduced at a later date.
Smaller businesses, sole traders, and landlords, will all have to switch to MTD within the next few years. The timelines are currently fluid as the Government agreed in March 2019 to slow the transition to better prepare businesses for the changes.
4. Are There Any Exemptions to MTD?
At present, sole traders, businesses under the VAT threshold, and landlords don’t have to file using MTD processes.
Some more complex businesses above the VAT threshold have been given permission to slow the transition to allow for the more complicated elements of their business.
Paper returns will no longer be accepted by HMRC except in case-by-case exceptions. For example, business owners in very remote rural areas with limited access to the internet may apply for an exemption.
5. What About New Businesses Registered This Tax Year?
The new MTD rules only apply to VAT-registered businesses who have already hit the £85,000 threshold in a previous year.
Even if your business turnover was below £85,000 in the last tax year, if you have ever filed a VAT return because your turnover was above the threshold, your business must comply with MTD rules.
That means new businesses launched in the new tax year will not yet have to comply, as the VAT threshold has yet to be reached. However, it’s sensible to maintain digital records from the launch of your business as you will be expected to file digital returns in the future.
6. What Is the MTD Timeline?
Currently, only businesses registered for VAT returns must comply with MTD, from 1st April 2019.
From April 2020, small businesses and the self-employed will also need to comply. Landlords may also need to comply at the same time, but this is subject to change.
Plans for Corporation Tax digital filing won’t be rolled out until at least 2021.
7. How Do I Submit My Tax Returns?
You need to use third party software to submit your digital tax return.
There are simple types, called bridging software, that allow you to take your current digital records and transfer them to HMRC. This type of software won’t have deep functionality but may suit small businesses and sole traders with simple accounts.
All-in-one accounting software will be MTD-ready. That means you can complete your day-to-day business transactions within the program, making records, audits, and returns very easy to complete. This type of software is more expensive but offers full functionality for daily business operations as well as tax compliance.
8. What Software Do I Need to Use?
You can only use software that has been approved by HMRC. This is because any other apps may not be secure or compatible with the HMRC system.
Find the full list of approved apps on the HMRC website here. This list is constantly updated, so if you’re already using accounting software that isn’t on the webpage, do keep checking for updates.
However, if your business already needs to be compliant from 1st April 2020, it’s highly advised to switch your bookkeeping to software already approved by HMRC.
9. Can My Accountant Still File for Me?
Your accountant can still file your returns on your behalf. You will need to provide them access to your accounting software so that they can submit directly to HMRC.
You will, however, still need to digitise your records and receipts. Your day-to-day accounting and financial transactions need to be in a digital format.
10. Will MTD Benefit My Business?
The downsides of MTD, such as new software and staff training, are outweighed by the benefits of digital tax returns.
Transposition errors, copied from a spreadsheet or paper file to a tax return, are less likely to occur. This saves a lot of time and also minimises the risk of a hefty, unexpected, tax bill.
Digitising records also aids audits and reduces the margin for human error in day-to-day bookkeeping. You will also easily be able to produce real-time reports for more critical business analysis whenever required.
11. Are There Penalties for Late Returns?
As with paper returns, there will be penalties for late returns via the new MTD system.
The penalty system is based on a points scale. For each type of late tax return – VAT, Income, and Corporation Tax – points are given. This system won’t come into effect until 2020.
12. How Long Should I Keep Digital Records?
You must keep digital records for the same length of time as you were keeping paper-based records: at least six years.
The advantage of digital records is that files more than a few years old can be archived easily into data storage. There is no need for paper-based files stacked in a storeroom: all records can be securely stored on hard disks.
Feeling Overwhelmed by the New Tax Return Rules?
The new Making Tax Digital rules, along with the requirements for newly digitised records, can feel overwhelming. This is particularly true when considering the still-vague timelines for Income Tax and Corporation Tax regulations.
If you need help preparing your business for MTD in 2020, or want to make sure your VAT returns are fully compliant this year, it’s time to speak to a professional. From bookkeeping services to full MTD compliance, contact us today to find out how we can help.