Making Tax Digital for VAT – Ensuring your business is Software Ready
The start of Making Tax Digital for VAT (MTDfV) is rapidly approaching, with businesses and landlords generating turnover above the VAT threshold (currently £85,000) having to comply with the new system from 1 April 2019. Those businesses and landlords generating income below the VAT threshold may also enroll into MTDfV on a voluntary basis, whilst some taxpayers, including charities, community amateur sports clubs and taxpayers unable to use digital equipment due to disability, age and remoteness of location, will be exempt from MTD altogether.
Other taxes, including personal tax and corporation tax are expected to become digital from April 2020.
What does MTDfV involve?
MTDfV will involve businesses and landlords keeping digital accounting records of business transactions using software, apps and spreadsheets, in order to submit quarterly figures to HM Revenue & Customs (HMRC) directly from the accounting software. The aim is to simplify the way businesses report their income, expenditure and taxes, ultimately working towards obtaining a more ‘real time’ view of their tax position from within the accounting software.
With this in mind, now is the time to ensure that your business has an adequate digital accounting program in place to make the transition to MTDfV smooth and seamless.
If you do not already use digital accounting software to record your business activity, you will want to consider implementing a system that is appropriate to the size and complexity of your business, whilst allowing room for future growth.
Essentially, the accounting software you select must be able to connect with HMRC’s Government Gateway, to allow quarterly summaries to be submitted directly. This is achieved by using an approved Application Programming Interface (API), which basically ensures compatible interaction between the accounting software and Government Gateway. HMRC are currently working with more than 150 software suppliers in preparation for MTDfV, to ensure that the API platform is in place ready for quarterly reporting from April 2019. Follow the link below to view the list of tested software suppliers:
In addition, the accounting software needs to have adequate functionality to be able to:
- Record the business name, the principal place of business, the VAT registration number, and details of any VAT accounting schemes used;
- Record the transaction level detail, including the tax point, net value of the transaction and the rate of VAT charged, about the supplies made and received and together with any adjustments made.
Essentially, if income and expenditure of a business is processed into the digital accounting software on a regular basis, it will be relatively straightforward to extract the figures required for quarterly reporting. HMRC will only receive the information contained within the 9 boxes as per a current VAT return; the only difference with MTDfV is that the return is processed digitally via the link from the accounting software.
Whilst many businesses still prefer to use traditional pen and paper methods when it comes to bookkeeping and preparing accounts, adopting digital accounting software can bring many benefits. Having a complete picture of your business activity at the touch of a button can speed up daily processes. Many software systems also have the functionality to allow you to reconcile banking, pay bills and interact with customers and suppliers online, ensuring you are running your business efficiently.
Small businesses not yet qualifying for MTD for VAT
Even if your business does not qualify for automatic enrollment into MTDfV from April 2019, it is a good idea to set up digital accounting software sooner rather than later, as HMRC will eventually require everyone to report digitally.
Businesses with very straightforward tax affairs may be eligible for three line accounts, whereby they only need to submit three lines of data i.e. income, expenditure and profit, on a quarterly basis. Free software with limited functionality is available for simple businesses, providing they meet certain conditions:
– They are unincorporated (e.g. sole trader or landlord)
– They have a turnover below the VAT threshold
– They have no employees
– They use cash basis accounting