Joanne Gilpin, cloud conversion manager for BHP Chartered Accountants – Making Tax Digital
Most people by now will have heard of Making Tax Digital (MTD), which comes into effect for most UK VAT registered businesses on 1st April this year.
If you’re a business owner, or handle the finances for an organisation, it’s important to understand whether this applies to you and take action as soon as you can.
MTD requires UK VAT-registered business with a taxable turnover above the VAT registration threshold (currently £85,000) to keep records digitally and submit VAT returns to HMRC using MTD-compatible software.
Some entities are deferred to a start date of 1st October – for what HMRC deems to be more complex cases. The HMRC website has a full list but it includes trusts, ‘not for profit’ organisations that are not set up as a company, VAT groups and annual accounting scheme users.
Some people will be more prepared than others, but it is worth noting that the new legislation applies to VAT periods beginning on 1st April 2019 and after. As an example, if you file quarterly VAT returns that fall in line with the calendar year, your first submission required under MTD will be for the quarter ended 30th June 2019.
Thinking back to when GDPR compliance came into force, the topic that focused people’s attention was the penalties that could potentially be handed out to firms. Businesses should be aware that MTD also comes with a penalty system for non-compliance, however HMRC are operating a ‘soft landing’ period for the first year, which should give firms time to get to grips with what is required. Expect HMRC to issue warnings where a business can show they have made a reasonable attempt to comply with MTD for VAT. If penalties are issued for non-compliance with MTD, they can start at £5 per day.
Failure to comply with MTD can’t be used as an excuse for not paying VAT. If VAT isn’t paid on time, the existing VAT default surcharge system will apply. Penalties of up to 15 per cent can be imposed if there have been earlier defaults in that penalty period.
A question I get asked regularly is – ‘what is the most practical way to submit my VAT return now?’.
Usually the best option is to do your book-keeping using a cloud-based software such as QuickBooks or Xero – both of which are MTD-ready. The advantages to this type of accounting software are much more than just being compliant with the new VAT rules.
A workaround for businesses who don’t use accounting software yet, or who have software which does not comply with MTD, may be to use Bridging software. This means that VAT returns would be filed from a spreadsheet through software designed to ‘bridge the gap’ between the spreadsheet and HMRC. This is also a preferred method for some VAT groups, or where calculations are being prepared outside a software, for example if Partial Exemption applies.
If you’re in any way unsure, the best thing to do is seek advice from an accounting professional. MTD is HMRC’s attempt to modernise our tax systems and collect underdeclared tax. It is causing a headache for some, but once a digital accounting system is up and running, there should be lots of time saving and information sharing benefits to come for every business.