Making Tax Digital (MTD) is an HMRC initiative designed to make sure the UK tax system is effective, efficient and easier for taxpayers. MTD is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs – meaning the end of the annual tax return for millions – this represents one of the biggest accounting shake-ups ever seen in the UK. MTD marks the beginning of a process that will eventually move all tax / National Insurance management and payment online, requiring digital record keeping and automated filing via the use of compliant software.
It is anticipated that the move to digital integration will eliminate many of the existing paper-based processes, allowing businesses and their agents to devote more time and attention to maximising business opportunities, encouraging growth and fostering good financial planning. Many businesses use an agent and MTD will allow agents to continue to provide a full service in supporting their clients.
The latest tax gap figures (2016/17) show that the cost to the Exchequer of avoidable mistakes in the tax administration system runs to over £9 billion a year. The improved accuracy digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records avoiding transposition errors, will, it is hoped, reduce the amount of tax lost to these avoidable errors.
HMRC has been operating private pilot schemes for both MTD for VAT and MTD for Income Tax to test software systems on a small scale before opening it out for a wider audience. It is for VAT that the first mandated use will come into force, as from April 2019 VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) will need to keep digital VAT records and send returns using Making Tax Digital (MTD) compatible software. Other businesses will not be asked to keep digital records or update HMRC quarterly for other taxes – primarily income tax and corporation tax – until April 2020 at the earliest, pending further government announcements.
Installing the right software is key for businesses, and it is important to note that HMRC will not be offering its own software products to equip businesses and individuals with the tools for digital record keeping and submission for VAT. This functionality will only be available through commercial software providers. HMRC hopes that these commercial software providers can offer a more flexible and tailored range of options that can cater not just to the requirements of the general business population but also specific businesses and sectors like agriculture, construction, landlords and freelancers.
Going digital with business records and taxes is the next step towards managing business finances in a more time-efficient manner, as millions are already banking and paying bills online. By keeping up to date digital records in real time, businesses are less likely to lose receipts and digital records can also reduce the risk of errors due to lost or incorrectly recorded invoices. Over time, nudges or prompts will be introduced into software which will help to eliminate common errors.
The government hopes that by making it easier to get things right, digital record keeping will reduce the risk of unwelcome and costly HMRC compliance interventions and help businesses to manage their cash flow more effectively. Keeping business records digitally means that it’s easier for a business to share their records with their agent, saving both time and costs, and allowing agents to focus on more value-added activity.