Making Tax Digital is here; as of 1st April 2019, businesses that are VAT-registered must store their records digitally and automatically submit their VAT returns to HMRC through MTD-compatible software. The regulation was first announced in the 2015 Spring Budget and, from 16th October 2018 onwards, some VAT-registered businesses were invited by the government to join the scheme through a public beta process.
Why Making Tax Digital?
HMRC is implementing this initiative to make the tax experience easier and better for both business and the government; however, this isn’t the only reason for the regulation. By facilitating the process, HMRC hopes to reduce the current tax gap – at the moment, the government estimates £9.4 billion in tax revenue is missing due to errors or incorrect submissions. HMRC believes it can collect £4.8 billion by 2023 with Making Tax Digital. Just between 2020 and 2021, the government expects Making Tax Digital will generate £610 million in extra revenue.
With many contractors still storing their records on paper (or utilising Excel spreadsheets), serious issues such as lost documents and misremembered information can occur easily. Whether accidental or deliberate, these errors are likely to be reduced with the introduction of MTD, because contractors will not be able to keep information on paper. Making Tax Digital will likely reduce this gap by eliminating errors stemming from calculations, by providing built-in help in accounting software, and by directly sending information to HMRC from the digital system.
What Does Making Tax Digital Mean for Contractors?
While HMRC launched its pilot phase in October of last year to half a million businesses, only approximately 16,500 opted-in, despite the fact that 1 million businesses will be affected by April. As a contractor, it’s important that you know exactly how MTD will impact you.
Designed to transform the UK tax system for individuals and businesses, MTD will introduce digital record-keeping and, according to HMRC, make the tax system more effective, efficient and easier for taxpayers. One of the biggest changes is that businesses will no longer report their taxes once a year, but quarterly instead – and all transactions need to be done and recorded on MTD-compliant accounting software.
This software needs to be able to keep and maintain records specified by Making Tax Digital, prepare VAT returns using information kept in those digital records, and communicate with HMRC digitally via its Application Programming Interface (API) platform. If your records are current, the accounting software will be able to collate and prepare your VAT return for you; once you confirm the information is correct, you can then submit it to HMRC.
As a contractor, you will need to switch to using MTD-compliant software for your VAT from the first day of your first VAT, starting 1st April 2019 or after. Therefore, in order to have a smooth transition to online systems, as well as to improve your efficiency, you need to start preparing now.
Currently, Making Tax Digital is only applied for VAT purposes, but it will be mandatory to use accounting software to submit income and national insurance contributions from April 2020.
Therefore, take this opportunity to entirely switch to digital now instead of waiting until next year. Transitioning now will reduce your administration time and cost later; it will also allow you to keep accurate records with real-time data. If you’re unsure how to even start preparing for MTD, enlist the help of contractor accountants who can sort everything for you and make sure you’re compliant.
What Digital Records Should You Keep?
With the introduction of Making Tax Digital, you will have to keep certain information as digital records. While you can still keep invoices in paper form if you prefer, you will have to record and store each individual transaction digitally, especially as HMRC wants records to be as real-time as possible.
So, which records will you need to keep digitally? Included in HMRC’s list is your business name, the address of your place of business, your VAT registration number, the rate of VAT charged, among others. The accounting software you use has to be able to display the audit trail between records and VAT returns. All details on supplies you made and receive will also have to be kept, including the time and value of those supplies. You will be required to keep these records for up to six years.
Who is Affected and Who is Exempt?
If your VAT-registered business has a taxable turnover above the VAT threshold of £85,000, you will have to opt-in this scheme. If, on the other hand, your business doesn’t reach this threshold, you’re not obligated to comply with the regulation, even though HMRC strongly encourages businesses below the turnover threshold to do so.
Some businesses will be exempt from this new regulation. Exemptions include those who cannot use computers for religious reasons or who are unable to use them due to age, disability or location, although the government determines these on a case-by-case basis. For example, someone may have basic digital skills but still be unable to deal with using accounting software. In this situation, HMRC will decide whether or not to offer an exemption. The same goes for a contractor working in a remote location without access to broadband. Businesses in insolvency are also exempt from Making Tax Digital for VAT.
Will Making Tax Digital Apply to All VAT Schemes?
There are several VAT schemes, each with different requirements when it comes to Making Tax Digital. For example, those under a Retail Scheme – you qualify for it if you use a Point of Sale system – are required to keep a digital record of their Daily Gross Takings. If your business falls within the Flat Rate Scheme, however, you won’t have to keep a digital record of your purchases as long as they’re not considered capital expenditure items (as then they could be claimed).
In essence, while you’re required to comply with Making Tax Digital no matter which type of VAT profile you use, there are certain records that can be kept and stored in other forms, such as paper.
Can You Defer Making Tax Digital?
A small number of businesses will be able to defer entry into the Making Tax Digital system for six months. If your taxable turnover is above the VAT threshold of £85,000, then it doesn’t matter if you’re a contractor, an unincorporated business, a partnership, a company or an LLP; you will be included in this new regulation. If you wish to apply for a deferral, you will need to be a trust, a not-for-profit, a VAT division or group, a local authority or public corporation or a trader based overseas.
There are other business categories that may postpone their entry into MTD – however, this deferment is highly unlikely to include contracting businesses.
When it comes to tax regulations in the UK, in-house systems and spreadsheets will soon disappear as we make the move towards complete digitalisation. With 1st April nearly here, switch to digital reporting in time and take advantage of up-to-date and real-time information to run your contracting business and boost your productivity.
Gorilla Accounting is a technology-driven accountancy firm, exclusively for contractors and freelancers operating through a Limited Company.
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What do contractors need to know about Making Tax Digital?