Making Tax Digital for Business

The government has started phasing in its landmark MTD initiative, which will see taxpayers move to a fully digital tax system.

In this factsheet we outline some of the key issues for individuals including the Personal Tax Account and Simple Assessment.

Making Tax Digital

Making Tax Digital for Business (MTDfB) was introduced in the 2015 Spring Budget. The government’s ‘Making Tax Easier’ document was published shortly after, and outlined plans for the ‘end of the tax return’. It also set out the government’s vision to modernise the UK’s tax system, with digital tax accounts set to replace tax returns for ten million individuals and five million small businesses.

Revised timescales

However, industry experts and those within the accountancy sector expressed concerns over the proposed pace and the scale of the introduction of MTDfB. As a result, the government amended the initial timetable for the initiative’s implementation, to allow businesses and individuals ‘plenty of time to adapt to the changes’.

The focus of MTD is currently VAT, which was implemented from April 2019.

The mandation of MTD for ITSA will now be introduced from April 2026, with businesses, self-employed individuals and landlords with income over £50,000 mandated to join first, a change from the current £10,000 limit.

Those with income over £30,000 will be mandated from April 2027.

The government will also review the needs of smaller businesses and look in detail at whether the MTD for ITSA service can be shaped to meet the needs of smaller businesses.

Following the new approach, the government will not extend MTD for ITSA to general partnerships in 2025.

Although MTD has been paused for individuals until at least 2026, HMRC has introduced the Personal Tax Account and Simple Assessment.

The Personal Tax Account

Personal Tax Accounts (PTAs) are digital tax accounts for individuals that have been created by HMRC, and are pre-populated with information held by it. PTAs are designed to permit individual taxpayers to communicate with HMRC, allowing them to update their financial details and check their tax affairs in real time.

Taxpayers may make use of a PTA to make tax payments, provide bank details to HMRC for tax refund purposes and provide details of taxable benefits from employment: for example, the use of a company car.

Individuals can register for a PTA by visiting www.gov.uk/personal-tax-account. The government predicts that, over time, the requirement to complete and file a tax return will lessen for those with straightforward tax affairs.

Simple Assessment

Under Simple Assessment, HMRC has the power to assess an individual's liability to income tax or capital gains tax, without the taxpayer having to fill out and submit a tax return.

Simple Assessment may be used to deal with the tax liabilities of:

• state pensioners whose state pension is higher than their personal tax allowance where the tax owed cannot be collected via their tax code.
• taxpayers with PAYE liabilities who have underpaid tax and cannot have it collected via their tax code.

Taxpayers are required to ensure that the information provided by HMRC is correct, and pay their income tax liability online, or by cheque, before a specific deadline, as outlined within the letter they receive. If the taxpayer believes the information to be incorrect, customers are given 60 days to contact HMRC.

Those that miss the deadline are encouraged to contact HMRC in order to discuss their circumstances. Individuals who fail to do so may be subject to penalties.

Over the coming years, the government will phase in its landmark Making Tax Digital (MTD) initiative, which will see taxpayers move to a fully digital tax system.

This factsheet outlines some of the key issues for businesses.

Making Tax Digital for Business

Making Tax Digital for Business (MTDfB) was introduced in the 2015 Spring Budget. The government’s ‘Making Tax Easier’ document was published shortly after, and outlined plans for the ‘end of the tax return’. It also set out the government's vision to modernise the UK’s tax system, with digital tax accounts set to replace tax returns for ten million individuals and five million small businesses.

Revised timescales

However, industry experts and those within the accountancy sector expressed concerns over the proposed pace and the scale of the introduction of MTDfB, and, as a result, the government amended the timetable for the initiative’s implementation, to allow businesses and individuals ‘plenty of time to adapt to the changes’.

MTDfB, starting with VAT, took effect from 1 April 2019, as summarised below.

Making Tax Digital for VAT (MTDfV)

Under the rules, all VAT registered businesses must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.

Only a small handful of businesses are exempt from complying with MTDfV. Please contact us if you believe your business may be exempt. The only automatic exemptions arise where a business is already exempt from filing VAT returns online or it is formally insolvent.

HMRC also has discretion to grant exemption in very limited circumstances, such as if they are persuaded a business is unable to use a computer, software or the internet for reasons such as disability, location or on religious grounds. Businesses are able to make an appeal against a HMRC refusal of exemption.

MTDfV 2022

Since April 2022 MTDfV has been mandated for all VAT-registered businesses. This means that even voluntarily registered businesses, trading below the current £85,000 compulsory VAT registration threshold, must keep the requisite digital records and file digitally. If this affects you, and you would prefer to consider deregistering for VAT, we are happy to discuss this with you.

VAT returns

Those businesses that fall within the scope of MTDfV are required to submit their VAT returns using software compatible with the MTDfV regulations. Information will be extracted from the digital records in order to populate the VAT return.

The changes introduced as part of the MTDfV project do not affect the statutory VAT return deadlines or payment dates, and businesses that choose to submit VAT returns monthly or annually can continue to do so.

Using third party software and keeping digital records

HMRC do not provide MTDfV software, and manual record keeping is not acceptable. Businesses must keep specified records in ‘functional compatible software’, which calculates the VAT return and submits it to HMRC via an Application Programme Interface (API).

HMRC acknowledges there are different ways to do this. However, the transfer of data to HMRC, from the mandatory digital records to the filing of the return, must be entirely digital. HMRC has published VAT Notice 700/22: Making Tax Digital for VAT setting out requirements in more detail.

The VAT notice defines functional compatible software as a ‘software programme or set of compatible software programmes which can connect to HMRC systems via an API’ which must be capable of:

• keeping records in digital form as specified by the MTDfV rules
• preserving digital records in digital form for up to six years
• creating a VAT return from the digital records held in compatible software and submitting this data to HMRC digitally
• providing HMRC with VAT data on a voluntary basis
• receiving information from HMRC via the API platform.

Records to be kept digitally are specified in the VAT Notice. They include ‘designatory data’; the VAT account linking primary records and VAT return; and information about supplies made and received including the different rates of VAT applicable. For supplies received, the amount of input tax to be claimed is also needed.

MTD is not completely paper-free, and it does not mean businesses are mandated to use digital invoices and receipts. However the actual recording of supplies made and received must be digital. Where invoices and receipts aren’t held digitally, they should be kept in hard copy as usual for VAT purposes.

Software issues

The digital records required for MTD don’t have to be held in one place or one programme. Businesses can keep digital records in a range of different compatible digital formats. The use of spreadsheets is allowed, in combination with add-on MTD software.

From 1 April 2021, where digital records are kept in more than one programme, or where add-on programmes are used, all programmes should be linked digitally. VAT Notice 700/22 defines these digital links.

Digital links

A digital link is a transfer or exchange of digital data between software programmes, products or applications. Where a set of software products is used, there must be digital links between them, and once data is entered into software, any further transfer or modification must be via digital link.

Manual data transfer is not allowed under MTD. An example would be noting details from invoices in one ledger, then using that handwritten information to manually update another part of the functional compatible software. Copying by hand or manual transposition of data between two or more pieces of software and 'cut and paste', or 'copy and paste' is not acceptable.

The VAT Notice outlines acceptable digital links, including:

• linked cells in spreadsheets
• emailing a spreadsheet with digital records to an agent for the agent to import data into software to make a calculation, such as a partial exemption calculation
• transferring digital records onto portable devices (pen drive, memory stick) and giving these to an agent
• XML, CSV import and export, download and upload of files
• automated data transfer
• API transfer.

Transition: soft landing penalty period

For VAT return periods beginning between 1 April 2019 and 31 March 2020, penalties will not be charged if businesses don’t have digital links between software programmes. This means ‘cut and paste’ will be acceptable while businesses update their systems. However, from 2020, HMRC will penalise non-compliance.

The transfer of VAT return data to bridging software to make submission to HMRC must always be digital, and is excluded from the soft landing provisions.

Exemptions

Under MTDfV, only a small handful of businesses are exempt. Please contact us if you believe your business may be exempt. Businesses will be able to make a right of appeal against a HMRC refusal of exemption.