Making Tax Digital (MTD) was introduced to the UK on 1 April 2019 as part of the Government’s plan to ease individuals’ and businesses’ tax monitoring and ensure they are paying the correct tax. Currently, the reform applies to VAT registered businesses, but going forward the intention is that it will apply to every single business entity that are required to complete and file tax returns digitally. Price Bailey’s advice to all businesses is to act quickly to ensure you are compliant, but also keep in mind that the reform is designed to encourage best practice in an increasingly digital world and may be a good reason to review your business processes as a whole.
While the country is in a period of significant uncertainty as a result of the COVID-19 outbreak, we anticipate that the timing of the next phase of MTD is likely to change, however this article is based on our current knowledge at this time and will be updated as things develop.
A reminder on how it works
In a nutshell, MTD makes it mandatory for businesses to keep digital accounting records and complete their VAT submissions to HMRC via an Application Programme Interface (API), utilising MTD compliant software. You can find more guidance on the current status of MTD in our 2019 Guide here.
For the last 12 months, MTD only applied to businesses who were compulsory VAT registered and to ease the transition period HMRC granted the business community a soft-landing period of 12 months, with no record keeping or late/incorrect submission penalties being applied.
MTD – Phase 2
As with any regulation or regime, MTD will continue to be an evolution. However, as we move into Phase 2 of MTD that is currently scheduled to begin in April 2020, these are the main changes businesses can expect:
- Your accounting records will need to be maintained on a suitable software that allows you to make live submissions with HMRC, bridging software which has previously been acceptable during the soft-landing period may not be accepted after the soft landing period elapses.
- Digital links will be required between the computer systems you use as part of your business processes. All systems will need to be integrated such that data can be transferred from one system to another automatically with no human interference.
- You will need to record the date and value of sales and purchases, and the rate of VAT charged. A key difference here is that whilst many businesses have previously entered daily or monthly totals into the accounting system or recorded transactions from statements, most businesses will now need to supply the information for each individual supply, however existing exemptions for retail businesses will continue.
During the soft-landing phase of the last 12 months, no penalties have been enforced while HMRC recognised that it will take time for businesses to get used to the new operating system. However, at the end of the soft landing, they will begin issuing penalties. How these will be enforced is currently unclear, albeit we anticipate that the severity of the penalties will be linked to the effort the business has made to try to be compliant.
What do I need to do to be ready?
Phase 2 will apply to submissions periods that begin after the 1st April; for the majority of businesses that report quarterly the first period to be impacted will be up to the end of June for which submissions are due on 7th August. However, businesses are advised to take steps to ensure they are prepared from April. Price Bailey’s advice to businesses is:
- With regards to reporting software, if you have integrated your records fully onto MTD compliant Software, we don’t anticipate you will have an issue as of April 2020. However, if you are still utilising legacy / non-MTD compliant software, spreadsheets, bridging software or multiple systems which aren’t digitally linked then you are at higher risk of having issues following the end of the soft landing period. Therefore, take steps now to ensure you are compliant.
- If in entering the next of MTD, you believe your business will not be compliant with the MTD regulations and are not sure what to do, please contact one of the team here. Our Business Systems team can conduct a review of your systems to identify the best solution for your digital reporting and ensuring you become MTD compliant.
This post was written by Chris Godsave, a Partner at Price Bailey and Lee Sharman Manager in the Business team. If you are concerned about MTD and have any questions on what this means for you and your business, please contact Chris using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.