Making Tax Digital: What you need to know

Making Tax Digital: What you need to know

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VAT for MTD? When each letter is pronounced in quick succession with rap-like intonation, you’d be forgiven for thinking this is the latest lyric of a leading hip-hop artist. Rapping about taxes isn’t as far-fetched as it first seems. In his famous requiem to unrealised dreams about ruling the world, ‘24 karats of gold’, American hip-hop sensation Big Sean laments why “don’t school teach more mathematics, less trigonometry and more about taxes”. 

The government’s plans to digitise tax reporting in the UK may not be as well known as Big Sean’s lament. But if you are one of the thousands of self-employed businesses registered for VAT who have never heard of Making Tax Digital, now might be the time to start paying attention.  

Making Tax Digital – also known as ‘MTD’ – is the name given to the government’s attempts to have people and businesses report their tax, well, digitally. 

From 1 April 2019, any VAT-registered business which makes more than £85,000 will be required to keep VAT records digitally and submit returns electronically, via new software, for the first time.

“This is one of the biggest changes to take effect in 2019 which impact self-employed businesses,” says freelancer body IPSE’s deputy director of policy Andy Chamberlain. 

“MTD for VAT is part of a much wider programme of reform – Making Tax Digital – which will ultimately change the way all businesses, including the self-employed, account and pay tax.”

This is the first stage of MTD reform. If you are self-employed, but not registered for VAT, then nothing will change for you this year – yet. 

“As other taxes and types of business are incorporated over the coming years into MTD, the likelihood is non-VAT registered self-employed will be affected,” says Mr Chamberlain. 

If you have never heard of this new MTD initiative, you’re not alone. In November last year, a powerful committee of the House of Lords issued its second report questioning the pace with which MTD is being rolled-out. 

“Where the government is wrong is not in the principle,” the Treating Small Business Fairly report of the Economic Affairs Committee report read, “but in the transitional arrangements.” 

According to the report, as much as 40 per cent of businesses affected have not heard of MTD.

“HMRC are not listening to small businesses, while offering a six-month deferral to many in the public sector,” said the committee’s chair, Lord Forsyth of Drumlean. 

“Small businesses will not be ready for this significant change to their practices if it is introduced on 1 April, particularly with Brexit taking place three days earlier. The government must delay its introduction.”

The government are still formulating a response to the report.

If you are VAT-registered, and bring in more than the £85,000 threshold, what should you do?

“People who are submitting VAT returns will have to report on a quarterly basis using specific software,” says Mr Chamberlain. 

A full list of software packages which support these new changes have been listed on the gov.uk website. 

As Mr Chamberlain confirms, many businesses, including some self-employed businesses, already report their tax quarterly. Therefore, for many businesses, the frequency of reporting won’t change, only the way in which they report.  

“The only change is a technical one. People reporting their VAT data through this software can often do this through an app. In many cases, I understand, these apps will automatically send a report to HMRC relatively simply.”

If you use an accountant to file your returns, you may not notice much change from 1 April 2019. Business owners are encouraged, however, to speak to their accountants to ensure they have provided them with all the necessary information during the transition period. 

Therefore, the changes which take effect on 1 April 2019 will only affect VAT-registered businesses who bring in more than the threshold. 

The next stage of MTD could be more problematic for the self-employed, as it is likely to prescribe digital reporting on income and corporation tax. 

“IPSE is a bit dubious of this course of action,” says Mr Chamberlain. 

“There are already groups, including the House of Lords committee, warning the roll-out of MTD for VAT is being rushed. “The self-employed don’t have the same access to finance departments as big firms.   

“While, in principle, we support digitising the tax system, we don’t like the idea that the self-employed will be used as guinea pigs for future reform.”

And that, it seems, is the real wrap on MTD. 

By Chris Piggott-McKellar