Making Tax Digital is Now Live: Are You Ready?
Making Tax Digital, or MTD, is the jargon for HMRC's scheme to move to digital reporting by businesses on their various tax affairs. It's now mandatory for most VAT submissions and there are indications other business tax reporting will be switched to digital formats in future. MTD for VAT went live from 1st April 2019, however, under a freedom of information enquiry, it appears that over 1 million UK businesses were either unregistered or still working towards registration at that date.
What does MTD for VAT mean for a business?
There are three key practical aspects of MTD compliance as follows:
records of transactions which include input or output VAT must be kept in a digital form.
any VAT registered business must sign up to Making Tax Digital for VAT, and
use software compatible with Making Tax Digital to submit VAT returns in future.
Are you signed up to MTD?
Any UK business with a turnover of £85,000 or above is required to register for VAT and charge 20% tax on the sale of those goods or services it supplies which are subject to VAT. By the same token, the majority of VAT registered businesses must now sign up to MTD rules and regulations with HMRC. Failure to do so could delay your next VAT return filing, leaving you open to paying too much VAT, incurring a late filing penalty or being charged interest on underpaid taxes.
For certain organisations MTD compliance has been delayed until 1st October 2019, but this applies only to those in the 'deferral group' as recognised and advised accordingly by letter from HMRC.
Signing up to MTD must be done at least 8 working days before your first MTD VAT return submission date. However, businesses that currently pay VAT by Direct Debit cannot sign up in the 7 working days leading up to, or the 5 working days after their previous VAT return is due. Therefore, you should sign up only after your last non-MTD VAT return has been reconciled and settled with HMRC.
Signing up is relatively simple. You can read more about the process and do so via HMRC's website. Follow their step by step guide and you should receive acknowledgement within 24 hours.
Are your records and software MTD compliant?
As mentioned before, VAT records must now be kept and sent in a digital form. You can find a full list of all HMRC verified software on their website, which includes some free packages and other relatively inexpensive ones. Spreadsheets are an acceptable digital form for recording transactions, but you'll need to use bridging software to convert and transmit spreadsheet data in a form compatible with HMRC's digital VAT return layout.
If you're considering switching your accounting software to be MTD compliant be sure to check out are blog post on this topic here.
Penalties for wrong or late submissions of VAT returns
You will only incur a penalty if you're late filing more than one of your VAT returns within a reasonable period. Higher surcharges are imposed if you're late in both filing and making payment of VAT due to HMRC. The value of any penalties and surcharges will be dependent on how late a payment is made and how much tax is owed.
If you do not file a return HMRC can issue a 'VAT notice of assessment of tax’, showing an assumed value of VAT payable and the date it's due. This could mean paying too much to HMRC, impacting on your cash flow. Interest will be charged on underpaid VAT in the following circumstances; where you paid according to an assessment of your VAT liability as you failed to file a return and this is later found to be an underpayment of what was due, where you pay too little or reclaim too much VAT due to undercharging on your sales, or other significant errors in calculating or reporting your VAT that led to an underpayment to HMRC.
It's always advisable to contact HMRC as early as possible if you discover any under or over reporting of VAT due or recoverable, to avoid penalties and accrued interest charges on these.
So long as you make a genuine effort to comply with MTD requirements you should be able to work with HMRC and avoid any extra costs.
Help and assistance with Making Tax Digital
You can find out more about MTD for VAT from HMRC's guidance on their website, your accounting software supplier or by seeking professional advice and support. If you need more specific help on this feel free to contact our team at Devonshire Green. Make sure you're fully prepared for MTD for VAT so you don't fall foul of HMRC's rules or deadlines.
We can help you to understand how MTD will impact on your business and ensure you stay informed and up to date on future tax changes and systems. Contact us today.