MPA
18th March 2022We’re now several years into the rollout of Making Tax Digital, an HMRC-led initiative designed to move the administration of tax responsibilities to digital.
The first phase of the changes required VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000 to keep digital records and use software to submit VAT returns.
Companies below that £85,000 threshold have been able to voluntarily join the Making Tax Digital service, but that’s all set to change next month.
From April 2022, all VAT-registered businesses will be required to follow MTD rules for their first tax return starting on or after that date. That means sourcing appropriate software, registering for the online VAT service, and ensuring records are kept digitally – and are linked when multiple systems are used.
There are also new penalties for those who don’t comply, affecting VAT customers for accounting periods beginning on or after 1 January 2023.
Digital records
Following MTD guidelines essentially means signing up for MTD for VAT which you can do online or through your agent/accountant, and keeping records digitally. These records include:
You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:
You must add all your transactions to your digital records, but you do not need to scan paper records like invoices or receipts.
How to record things digitally
You need to use a compatible software package or other software (like spreadsheets) that connects to HMRC systems. Records kept across multiple packages must be linked to be MTD compliant, so if you currently use one system for record-keeping and another for submission, you may need to make some changes there, too.
Here are MPA we’re a Xero Gold Champion Partner and use Xero software for our clients, but we can also advise you on the options available and how certain systems can work together.
When to sign up
All VAT-registered businesses, regardless of turnover, must be signed up to the Making Tax Digital service and follow MTD rules for their first tax return starting on or after 1st April 2022.
Be mindful not to sign up to MTD too close to the date of your return or your direct debit payment to avoid duplicate payment issues, though. HMRC recommends you avoid signing up seven days before your return is due or five days after it’s due, and to do so at least three days before any direct debit is to be taken.
Penalties
From January 2023, Making Tax Digital related penalties will become part of HMRC’s new points-based system for late submissions and payments.
The new penalty system means:
Source: Xero.com
Exceptions
You can apply for an exemption if it’s not reasonable or practical for you to use computers, software, or the internet to follow the rules for Making Tax Digital for VAT.
This could be because:
HMRC will consider each application on a case-by-case basis.
What’s next?
Making Tax Digital for VAT is the first phase of plans designed to make HMRC one of the most digitally advanced tax administrations in the world. In the next few years, MTD for Income Tax will come into force, and further consultations and roll-outs should be expected.
MTD for Income Tax
Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax from 6 April 2024.
MTD for Corporation Tax
The government has published a consultation on the future design of Making Tax Digital for Corporation Tax and will provide businesses with an opportunity to take part in a pilot for Making Tax Digital for Corporation Tax. It’s said it won’t and will not mandate its usage before 2026.
Help is available
Making Tax Digital doesn’t have to be overwhelming when you get the right advice.
We’ve been helping SMEs prepare for MTD changes since the beginning and we’re happy to lend a hand, just get in touch.
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