The Making Tax Digital (MTD) Initiative

The government originally announced the Making Tax Digital (MTD) initiative in 2015. The stated goal was to make the UK’s entire tax system less complex and more effective.

When launched, VAT MTD had ambitious goals intended to be reached by 2020. Self-assessed income tax, value-added tax, and corporation tax were to be tracked digitally and updated quarterly for businesses, landlords, and the self-employed.

The government’s original timeline broke the introduction of MTD into two phases, covering the 2018-19 and 2020-21 tax cycles.

Extensive financial consultation led the government to revise its schedule. An announcement made in July 2017 pushed MTD’s introduction back to April 2019. Also, the initiative would be applied solely to VAT at first. The earliest time frame now being considered for expanding to other taxes is 2020.

What does the MTD initiative require, and how will UK businesses be affected?

One of the chief objectives the government had outlined for the MTD initiative was to assist businesses with tax difficulties and close the tax gap. Estimates show that the annual loss of revenue due to simple errors and mistakes in tax arrangements is over £9 billion.

The government promoted the MTD scheme to businesses by emphasizing benefits it would deliver to them. These include better awareness of their own tax standing, full-time access to their tax information through a centralized online location, better collaboration with agents, and more effective budgeting and planning. Altogether, these benefits promise easier financial management and better performance for all UK businesses. The government suggests the MTD is exactly what businesses need in order to be more productive and competitive. The scheme encourages all businesses to take full advantage of the efficiency improvements offered by digital technology.

MTD As It Applies To VAT

The MTD will take effect for many businesses from April 2019 onward. Any business with turnover above the VAT registration threshold (currently £85,000) must begin keeping their VAT records digitally. VAT returns after that time will have to be submitted to HMRC using MTD-compatible software.

All of the following information needs to be a part of a business’s digital records:

* Business name, primary place of business, and VAT registration number (this information should be accompanied by the business’s VAT accounting scheme)

* A VAT account with a clear audit trail linking the business’s VAT return to its primary records

* Detailed records of supplies made and received

Every business must use compatible software to submit VAT returns. This software will extract information directly from the company’s digital records.

Businesses are obliged to preserve their digital records for six years.

Any necessary amendments to a business’s VAT return will follow the existing error correction rules. Businesses have four years to correct accidental errors on subsequent VAT returns. Errors that do not meet the regulatory definition of “non-deliberate” should be handled by submitting form VAT652.

MTD Applied To Corporation Tax

Corporation tax will not be affected by the new MTD scheme until at least 2020. The latest word from HMRC is that they will not expand the initiative beyond VAT until they have thoroughly verified that the system works. Its effectiveness is to be thoroughly tested before any expansion.

Landlords And The Self-Employed

Landlords will need to need to join VAT-registered businesses in reporting for VAT after the April 2019 deadline. Again, this applies only to those with income over the current VAT threshold of £85,000.

Voluntary Participation

Businesses that fall outside the initial mandatory scope of the MTD initiative are still able to participate voluntarily if they so choose. HMRC is already expecting to see many businesses switch to digital VAT record-keeping after April 2019 even if they are not required to do so.

Businesses also have the voluntary choice to submit their VAT data through the digital system more frequently than required. Voluntary updates which come more frequently than the regular cycle for VAT returns may become a useful tool when a business experiences a change in circumstances and wishes to notify HMRC.

MTD Exemptions

Many different businesses are eligible for an exemption from the MTD scheme. Businesses that are unable to use electronic communications will be allowed to continue using traditional record-keeping. Possible reasons for exemption include geographic remoteness, age, disability, insolvency, and religious beliefs.

The Cost of MTD

The shift to MTD is likely to expose businesses to both one-time and ongoing costs. While the full expense of the shift for a given business is impossible to predict, all of the following factors could, potentially, apply:

On the one-off side, the transition to the MTD scheme will likely require some investment. New MTD-compliant software will need to be procured and implemented, hardware may need to be upgraded, staff will need new training, and there may be accountancy or agents costs.

The potential ongoing costs businesses face include: continuing to operate MTD-compatible software; operating bridging software to make existing systems MTD-compatible, and increases in software costs all around as MTD-related software improvement costs are passed along to businesses.

MTD Software

Under the new scheme, businesses will rely on software designed to connect to the systems of the HMRC via a fully-compatible Application Programming Interface, or API. A business’s financial software resources must give it the following capabilities:

* Keeping digital records in an MTD-approved format

* Preserving digital records according to applicable regulations

* Using the software’s digital records to create a VAT return and send that return to HMRC digitally.

* Making VAT data available to HMRC on a voluntary basis.

* Receiving important information via the HMRC API platform – such information can be vital in ensuring a business’s regulatory compliance.

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