VAT-registered businesses need to adhere to new, digital record-keeping requirements from 2019 under the first phase of the UK's 'Making Tax Digital' programme. Are you ready?
In line with the tax digitisation projects of countries worldwide, the United Kingdom's 'Making Tax Digital' (MTD) programme is designed to streamline tax filing and reporting processes for businesses and individuals. It will make access to information more readily available and replace the traditional paper trail with a digital one. In practice, MTD means that those with UK tax obligations will report in to the tax office – Her Majesty's Revenue and Customs (HMRC) – through directly-linked software.
The first phase of MTD begins on 1 April 2019, with the implementation of MTD for VAT. All VAT-registered companies and organisations in the UK with taxable turnover above the £85,000 threshold will need to meet the new reporting requirements.
Other tax reporting – for example Corporation Tax – will follow VAT but not before April 2020 at the earliest.
At the moment when VAT returns are submitted to HMRC, they are typically prepared using third-party software. The necessary information is then transferred to HMRC via a different platform. In circumstances where HMRC may require more information, that process is also detached from the tax office's main systems.
From April, applicable businesses will need to do the following.
- Keep all accounting records in a spreadsheet or using customised software. Paper records will no longer meet the legal requirements.
- Use API (Application Program Interfaces)-compatible software to file their VAT returns.
Phase one implementation of MTD is designed to streamline the VAT filing process, make subsequent information more readily available to HMRC, and reduce the number of errors that are currently found in the returns (which the tax office says costs them a significant amount of money).
The benefits of Making Tax Digital
While there's an obvious revenue-boosting aspect to MTD for HMRC, the move should also prove financially beneficial for companies. Instances of errors, missed or late filings will reduce, and subsequently so should the burden of making corrections and paying fines.
More streamlined – but potentially more complex
MTD will ultimately make filing easier, but we expect the transition to new software systems and processes to cause a short term complexity 'spike' that will see the UK rise from its 2018 position of 72nd – or 23rd least complex globally – in the next Financial Complexity Index.
Similar situations in other countries have reflected in our complexity rankings. These include the Latin countries including Brazil that make up half of the top 10 in this year's list. Like the UK, they're in the midst of digitising their filing processes. The introduction of VAT in the UAE saw the country increase in complexity from 92nd to 74th in 2018. And implementation of withholding tax in France next year is expected to result in a similar, short-term financial complexity boost for the country.
Regardless of MTD changes, the underlying rules around tax and accounting in the UK can be quite complex, particularly for financial controllers who are unfamiliar with the local market. That's why it's essential to have appropriate UK accounting and tax knowledge, either in-house or through a provider like ourselves so that you know all information is in line with the latest UK legislation and standards.
If you don't choose to work with a service provider in preparation for the start of Making Tax Digital, the work to get ready to file VAT returns involves buying and installing relevant compatible software. Bookkeeping records must also be maintained in a way whereby all information is digitally linked (as per HMRC's definition). Companies with a high volume of transactions can expect even more complexity, and this is where it's quite beneficial to work with local experts that can take care of the details for you.
As this is the first implementation of a new system, the UK business community is anticipating an unofficial 'grace period' of about one year for non-compliance with MTD. However, businesses that are late getting up-to-speed do potentially risk fines and penalties.
Talk to us
Now is the time for businesses to be talking to their service providers about the necessary preparations for Making Tax Digital, including how they can make sure they will be compliant from the get-go.
TMF UK has commenced software updates to make sure all of our clients are fully integrated and compliant from the start of April.
Know you need to prepare, but not sure where to start? We can help. Get in touch with us today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.