Making Tax Digital will be one of the most far-reaching shake-ups of tax administration in the United Kingdom since the introduction of self-assessment. Here we summarise what taxpayers need to know before the regime goes live for VAT payers from 1 April 2019.
Reasons For The scheme
Making Tax Digital (MTD) is intended to simplify income tax and value-added tax compliance for taxpayers, and to improve the accuracy of tax and VAT returns to reduce the "tax gap".
Under the scheme, which is currently being piloted, taxpayers will be required to digitally maintain their business records and accounts, using software compatible with HMRC’s Application Programming Interface (API) platform. These records will then be used to automatically generate tax returns.
VAT-registered businesses with a taxable turnover above the VAT registration threshold will have to use the MTD service to keep records digitally and submit their VAT returns from 1 April 2019. Currently, the UK's VAT registration threshold is £85,000 and the recent Budget confirmed that this threshold will be unchanged in 2019.
However, a "small minority" of VAT-registered businesses seen as having complex arrangements will be allowed to join the system from 1 October 2019 to ensure there is sufficient time to test the service. On 13 July 2018, HMRC published a VAT Notice which explained the rules for Making Tax Digital for VAT and the digital information that must be kept.
According to this notice, businesses must digitally record:
Designatory Data, Including:
- Business name
- Address of principal place of business
- VAT registration number
- The use of any VAT accounting schemes
Supplies Made, Including:
- Time of supply
- Value of the supply
- Rate of VAT charged
- Supplies Received, including:
- time of supply
- value of the supply
- amount of input tax claimed
- Supplies made and received by third-party agents
- Reverse charge transactions
Summary Data, Including:
- Total output tax owed on sales
- Total tax owed on acquisitions from other EU member states
- Total tax to pay on behalf of a supplier under a reverse charge procedure
- Total input tax claimed on business purchases
- Total input tax allowable on acquisitions from other EU member states
- Total tax to be paid or reclaimed following a correction or error adjustment, and
- Any other adjustment allowed or required by VAT rules
- Income Tax
The Government announced in July 2017 that the pace of MTD’s roll-out would be slowed. Therefore, digital record-keeping and quarterly reporting by small businesses and landlords for income tax purposes has been deferred until at least April 2020.
However, sole traders with income from only one business, and taxpayers who rent out UK property (excluding furnished holiday lettings) are being invited to report information to HMRC concerning income tax under MTD as part of an ongoing pilot scheme.
As with the VAT scheme, taxpayers are required to use compatible software to keep records of income and expenses and transmit these to HMRC every three months. The system enables taxpayers to view an estimate of the tax that will be owed at the end of their accounting year. A final report must also be sent at the end of the accounting year to confirm income and expenses. Allowances and reliefs can be claimed within the final report.