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Overview of Making Tax Digital

Making Tax Digital (MTD) is an initiative of UK government in order to revolutionise its taxation system and become one of the most advanced tax authorities in the world. The intention behind the introduction of Making Tax Digital is to make the tax system more effective, efficient for the tax payers. MTD transformations projects are taken care by the Her Majesty’s Revenue and Customs (HMRC) and it sets out a vision for the end of the tax return and a transformed tax system by the year 2020.

Making Tax Digital will affect not only the individuals but also the businesses and other organizations and agents; and how they maintain their accounting and tax records as well their communication with the HMRC, which is of the belief that this new and improved tax system will require the majority of business owners and organizations to maintain digital records using the compatible software. HMRC is also working closely with various developers in order to develop accounting software to have an easy and smooth switch to digital tax.

What is HMRC Making Tax Digital (MTD)

Introduction to Making Tax Digital for VAT

HMRC is all set to launch Making Tax Digital in April 2019 which is also its one of the most ambitious plan under which every VAT registered business which is over the registration threshold will be required to submit their VAT returns digitally, with minimal or no human intervention. However, before Making Tax Digital becomes an integral part of everyone’s life in the United Kingdom, HMRC needs to look into following challenges which a businesses and agents might face while switching to Making Tax Digital:

Also Read: VAT Registration

Challenges while switching to Making Tax Digital:

  • Changes to record keeping: In a traditional way of record keeping businesses opt either for manual records or spreadsheets or accounting software and most of the business opt for a combination of all three. However, under Making Tax Digital initiative, businesses can no longer use manual record keeping and all records need to be maintained in functional compatible software which can connect to the HMRC’s interface. The required software must be able to cater for the following requirements:
    • It must keep all the records in the digital form.
    • The records must be preserved in its original format for at least 6 years.
    • It must be able to create a VAT return from the digital records.
    • It must be able to provide HMRC with the information regarding the VAT return of the businesses digitally.
    • HMRC, if so desired, should be able to fetch additional information from the software.
    • It should also incorporate and fetch information from HMRC about the business’s compliance record.

    Transiting businesses from manual record keeping to digital record keeping as per the original MTD proposal is for sure going to be a challenging task for the HMRC mainly because businesses will not only need appropriate software but will also need a bridging software or API-enabled spreadsheets in order to digitally submit the VAT return data to HMRC. Making Tax Digital being a pan country initiative, it is advisable for the business owners, individuals and agents to start planning the move to digital records sooner than doing it in the thirteenth hour and thus miss out on its nuances

  • Changes to VAT return submission: One of the main features of Making Tax Digital is to enable VAT registered business, if above the registered threshold to enter and submit their VAT returns digitally through a business’s functional compatible software communicating via HMRC’s API platform and not manually. While switching to digital method, it is important to note that the details from the accounting software should be transferred digitally rather than doing it manually. HMRC has given a time period till 31st March 2020, also called as soft landing which can be utilized to put digital links in place and allows businesses and individuals to use “cut and paste” and “copy and paste” to transfer the data between the software packages. As per the statistics only 13% of the current VAT return is being filed directly from the software whereas remaining 87% are still being filled manually into the HMRC government gateway page mainly because majority of businesses use manual spreadsheets to compile the VAT return figures and thus in order to comply with the MTD, it is quite a challenge for these businesses to review and digitize their processes wherever necessary including either creating or purchasing new software and developing functionality to enable the automatic linkage. This can be done in two main ways:
    • It is possible to make the VAT calculation outside the software either on a spreadsheet or manually and enter the effect of the calculation back into the software and thus can submit VAT return directly from the software.
    • Another option is to export the data from the software into a spreadsheet along with the adjustments and VAT return calculation and extract the VAT return figures with the help of either API enabled spreadsheet or bridging software and then submit the figures to the HMRC.

      However, MTD proposal has listed down the exemptions for the following from MTD for VAT:

    • If your business meets one of HMRC’s MTD exemptions:
      • If there is any religious belief which is not in synchronization with the use of electronic communications – However, in order to avail the exemption, you must apply to the HMRC via the VAT helpline and the present standard evidence for not reasonable practical will be considered for exemption from online filling for VAT returns.
      • If there is a reasonable and valid ground such as age, disability. Remoteness of location or any other reason: Businesses falling under this section can still choose to file their VAT return digitally, however if they want to withdraw their election at a later time provided they still fulfill the exemption criteria. Also, if a VAT registered business’s taxable annual turnover falls below the registered threshold after previously exceeding it, then it must comply with the requirements of Making Tax Digital.
      • Subject to an insolvency procedure.
    • If you have registered under VAT voluntarily and are trading under the VAT turnover threshold.
  • Timing: As per the Making Tax Digital proposal, it is scheduled to commence from 1st April 2019 which is exactly the time of Brexit and thus there is lot of uncertainty around the VAT treatment of transactions between the UK and European Union. So, it has become important for the businesses to both understand any changes to tax rules as well as to ensure that their accounting systems deal with such transactions correctly.
  • Approved accounting softwares: In order to achieve its desired objective, HMRC has been working with a wide range of software developers in order to have suitable software for businesses and their advisers and has published list of recognized softwares including bridging software which is nothing but a digital tool in order to connect various accounting softwares to HMRC systems and gives you a platform to submit your VAT return information to HMRC digitally. Few of them are listed as below:
Software Provider/ Software Who Can Use This Features
@gosimpletax Agents and businesses Digital record keeping Submit VAT return View VAT return View VAT liabilities View VAT payments
aaaDataX Agents and businesses Submit VAT return (bridging software) View VAT return View VAT liabilities View VAT payments
Abratax Agents and businesses Submit VAT return (bridging software) View VAT return View VAT liabilities View VAT payments
Deloitte VAT Agents and businesses Digital record keeping Submit VAT return (bridging software) View VAT liabilities View VAT payments
FreeAgent Agents and businesses Digital record keeping Submit VAT return
IRIS Agents Digital record keeping Submit VAT return (bridging software) View VAT return View VAT liabilities View VAT payments
My Digital Accounts Agents and businesses Digital record keeping Submit VAT return View VAT return View VAT liabilities View VAT payments
Oracle NetSuite Businesses Digital record keeping Submit VAT return View VAT return
PWC Spreadsheet Agents and businesses Submit VAT Return (bridging software) View VAT return View VAT liabilities View VAT payments
Tax Automation Agents and businesses Digital record keeping; Submit Vat return View VAT return View VAT liabilities View VAT payments

When will the changes happen to Making Tax Digital?

HMRC in its Making Tax Digital proposal has given a roll-out plan over a time frame of 4 years i.e. starting from April 2107 till April 2020 as described below:

  1. April 2017: Private pilot of roll-out starts.
  2. July – December 2017: To give an overview of taxpayers liabilities in one place and private pilot of Making Tax Digital for VAT in another.
  3. Spring 2018: To start with live pilot of Making Tax Digital for VAT.
  4. April 2019: In order to give businesses (whose turnover is above the VAT threshold) a first-hand experience of Making Tax Digital initiative, they have to maintain their records manually and also submit their quarter returns for VAT purposes only through their accounting software.
  5. April 2020: HMRC aims to widen the scope of Making Tax Digital by making it a vital and indispensable part of every business and their advisers.

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