Most business owners will now have heard of the Government's plans for Making Tax Digital (MTD). There are various elements within this to be implemented over a number of years. Some of this has already begun, such as Personal Tax Accounts and Business Tax Accounts on the HM Revenue & Customs (HMRC) website, while income tax and corporation tax implementation are not scheduled until 2020.
This article will focus on the imminent changes surrounding Making Tax Digital for VAT.
The changes will have a big impact on some businesses and fundamentally change the way that the tax system operates. To some this may feel like more red tape being introduced and additional costs being forced upon them. Our view is that this is a great opportunity to modernise your record keeping, take advantage of improvements in technology and implement a system which can help move your business forward. Cloud bookkeeping software can connect to your bank account and vastly reduce the amount of time needed to complete your bookkeeping. Not only does this give you more time to spend on your business or with your family, but the real-time data that is produced can give insight that can help you grow your business or become more profitable. We would therefore recommend looking at the positive side of MTD and making the changes to give you these benefits.
HMRC envisage that checks embedded in software will improve the quality of data submitted to them, acting as a first check of the information. This will reduce errors and help to close the 'tax gap' from mistakes in VAT returns.
Who will this affect?
MTD for VAT will apply to all businesses that are VAT registered and have a turnover above the VAT registration threshold (currently £85,000 per annum). It does not initially apply to those businesses who have a turnover below the VAT registration threshold but are voluntarily registered for VAT, although these businesses will need to comply from 2020 with the income tax or corporation tax regulations. Other businesses can opt to join the scheme.
What does it mean?
These businesses will need to maintain digital records and send their VAT returns through MTD compatible software starting from the first VAT return period commencing on or after 1 April 2019.
Handwritten records will no longer suffice, nor spreadsheets which will not connect to HMRC. You are able to use more than one piece of software to maintain your records but these must also be digitally linked.
The new requirements mean that you need to keep digital records of all your sales and purchases broken down by VAT liability (separate totals for standard-rated sales, zero-rated sales, etc.), as well as additional details on adjustments that you make to the VAT liability, such as for car leasing costs.
Do I need to do anything?
Many businesses will not need to change the way that they current keep their records. Most cloud bookkeeping systems will be compatible by the time that MTD for VAT comes in to effect but if you are unsure if your system will be compatible then we can check for you. Those using desktop bookkeeping software may need to upgrade top the newest version of the software and others may need additional software to make the connection.
MTD compliant software can include spreadsheets but these must be able to send and receive data via API. This means that spreadsheet users will need software to bridge the gap between their spreadsheet and HMRC. This will not be provided by HMRC and may be expensive to link to current spreadsheet solutions. Our suggestion is that spreadsheet users consider moving to cloud accounting software.
If you currently keep manual records you will need to make some changes. We would advise that this change is made as soon as possible to ensure that you are used to the new system before April 2019. Contact us if you need assistance or would like us to take over your bookkeeping.
If you currently use a software package for your bookkeeping but calculate your VAT separately using a spreadsheet then you will need to ensure that these are digitally linked and can interface with HMRC.
Are there exceptions?
There are exemptions for businesses subject to an insolvency procedure, if a business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations or if it is not reasonably practicable to use digital tools to keep your business records or submit your returns for reasons of age, disability, remoteness of location or for another reason. It is yet to be seen how strictly HMRC will apply these exemption criteria so our advice would be to be prepared to comply with the changes, particularly given the additional advantages outlined above.
HMRC have released a list of software currently approved for MTD. This includes Xero which is our preferred cloud-based system. We are Xero Platinum Partners and experts in its implementation. However, we do use many other systems and will be able to implement whatever is best suited to you and your business.
Bromhead are forward thinking and we can assist with system changes that you may need to comply with the new requirements or alternatively we can complete your bookkeeping and record keeping for you. Contact us on 01752 697397 or firstname.lastname@example.org to discuss this further with one of our team.