The deadline for eligible businesses to follow Making Tax Digital (MTD) rules is imminent! We’ve been approached by business owners who have concerns about MTD and how it affects them. So … here’s our comprehensive guide to MTD, cutting through the rumours and presenting the facts:
Which businesses should comply with MTD, and when?
Essentially all VAT-registered businesses must meet MTD requirements from their first tax return starting on or after 1 April 2022. The new element is that this now includes businesses that have a taxable turnover beneath the VAT threshold (£85,000pa) – those which have voluntarily registered for VAT. Businesses with a turnover over £85,000pa should already be complying with MTD requirements.
What action is required?
It is now a legal requirement to use a digital system to keep your bookkeeping and accounting up to date. There’s a plethora of systems out there – each with their pros and cons. At re:accounts, we love Xero for its simplicity yet ability to cope with all business requirements in one place, along with great reporting.
Your digital records do not need to be accompanied by scans of hard copy records, such as receipts.
There are three main elements to the digital records you need to keep under MTD:
- permanent data (i.e. business name, address, VAT registration number, details of any VAT accounting scheme used);
- the VAT account (broadly similar to current requirements); and
- transaction data.
Transaction data includes the following records:
- 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.
What software is acceptable to HMRC?
This is clarified by HMRC as below:
“Functional compatible software is:
- a software program or set of software programs
- a product or set of products
- an application or set of applications
“It must be able to:
- record and preserve digital records
- provide HMRC information and returns from data held in those digital records, using the API platform
- receive information from HMRC, using the API platform
“The complete set of digital records to meet Making Tax Digital requirements does not have to be held in one place or in one program. Digital records can be kept in a range of compatible digital formats. Taken together, these form the digital records for the VAT registered entity.”
Does MTD seem overwhelming?
Firstly, please remember that the friendly experts at re:accounts are here to help you. “New systems can seem daunting,” says Darby Nicholls from the Stevenage accountancy practice, “however once you get used to digital record keeping, we think you’ll be impressed by the time-saving, accuracy and reporting benefits available.”
Secondly, you may qualify for a MTD exemption, stated by HMRC as being:
- your location – for example, if you cannot get internet access at your home or business premises, and it’s not reasonable for you to get internet access at another location.
- a disability – for example, if you cannot use a computer, tablet or smartphone for the frequency or amount of time it takes to keep digital records for your business.
You might not be exempt if you:
- believe you should be exempt purely because of your age – HMRC will consider how your age and circumstances impact your ability to follow the rules for Making Tax Digital
- believe you should be exempt because you’re unfamiliar with the relevant software – HMRC will take into account how much you use (or intend to use) digital devices for other purposes, and if it’s reasonable for you to learn how to use Making Tax Digital software
- consider yourself to be a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications, but you already file online and use a computer or smart device for other business or personal uses
Are you in a dilemma about MTD?
We find that a natter and a little caffeine always make things clearer. Let’s talk!
