By the end of March 2019, UK businesses will need to be prepared for what many consider to be the biggest change for years in how they deal with HMRC, and it has nothing to do with Brexit. The changes, which will affect every single transaction a business makes, come from what HMRC calls Making Tax Digital – MTD
Jason Piper, senior manager for tax and business Law at the ACCA, an accounting body, says that “the underlying goal is to transform the whole UK tax system, both HMRC’s internal IT infrastructure and the way that taxpayers engage with it.”
But there have been problems with the rollout that have been compounded by unprecedented political developments such as the snap election and the Brexit referendum. The result is that the initial plans to force virtually all businesses to keep their records digitally from 2018 have been abandoned; now all but the barest bones of MTD have been put on hold to free up resource for Brexit. Nevertheless, businesses will have much to worry about from next April.
The impact on firms
From April 2019 HMRC will have MTD in place for VAT for all businesses above the compulsory registration threshold of £85,000, whether they report monthly or quarterly, or whether they are net payers or reclaimers of VAT. Income and Corporation Tax will follow at some point.
Of course, as Piper notes, MTD won’t apply to those businesses not (yet) registered for VAT – “even if they do subsequently register for VAT, they’ll be outside of the regime until 2020. Unfortunately, that doesn’t necessarily mean they can relax.”
Those who are VAT registered need to prepare now.
For VAT, MTD alters how online filing works and makes a huge change to how businesses prepare for that submission. HMRC’s existing web portal will close for MTD filers and instead they’ll need to use specialist software to create and submit their return.
“But the biggest, unprecedented, change,” explains Piper, “is in how much control HMRC’s processes will have over how you run your business. Under online filing, you submit your VAT return to HMRC in their prescribed digital format so it’s easy for them to process. But you’re in control of how the records are kept that help you work out the nine numbers you need for the return. Under MTD, it’s not just how the nine figures reach HMRC that’s legally regulated; it’s how they’re calculated, and the format (electronic) of the records that support it which is laid down in law.” Every transaction will need to be recorded digitally (on a spreadsheet or in accounting software) and those records have to automatically drive the return calculation.
Action to take now
Piper says that the first step is to simply establish if HMRC expects MTD to apply, that is, if the business is turning over more than £85,000 per year. The answer for a pharmacy will clearly be ‘yes’.
Next, if the business already uses an accounts software package then it will probably support MTD filing and record keeping – the key is to check without delay. Some suppliers are asking customers to move from desktop licenses to cloud subscription services which will be far more expensive.
“If you don’t use any digital tools” says Piper, “then you’ll need to quickly do your own research to find a suitable product.” He reckons that there will be an official HMRC tool, but businesses might do better to search out resources that accountants use. Accountingweb.co.uk offers reviews on products.
Spreadsheets will still be fine for the basic record keeping Piper advises, “but you’ll still need access to a filing package as well, known as ‘bridging software’. In a variation on the current practice of phoning your accountant every time with the nine figures, you could post them a USB stick, or email a spreadsheet with all your records (in the right format) once a quarter. Their software could do the rest, but it’s likely to cost more than the current equivalent.” Of course, doing this means that there’s scope for things to go wrong, and it will mean an accountant doing more, which will be reflected in their bill.
MTD is not going away and it will disrupt how a business copes with, and reports, its VAT. Those that don’t prepare will find themselves sitting on a cliff edge once the present online portal closes next April. The answer is to prepare now.