Making Tax Digital Phase 2
Back in 2019, we published a blog post in which we introduced the Government’s Making Tax Digital (MTD) scheme. You can find a regularly updated guide to Making Tax Digital (MTD). The Government’s aim is to reduce the amount of tax lost due to avoidable errors from manual data entry. HMRC recently shared figures that those mistakes cost The Exchequer £8.5 billion in the tax year 2018/2019.
The first phase of MTD started on 1st April 2019 and VAT registered businesses with an annual turnover of over £85,000 have, subject to a small number of exceptions, since had to keep records digitally and submit all VAT information to HMRC through a compatible software and not through manual entry via their online portal. To make the change for businesses easier, HMRC granted a “soft-landing period” for the digital link until April 2020, and this has been extended for another year due to the coronavirus pandemic. However, the extension period is now ending on 31st March 2021 and any manual copying and pasting of data from one system to another will no longer be accepted by HMRC and might result in penalties.
In this article we explain what a digital link is and how the future roadmap in the Making Tax Digital (MTD) scheme looks like.
Establishing a Digital Link
In simple terms, from the 1st of April 2019, businesses in MTD for VAT are required to maintain their accounting records digitally in a software product or spreadsheet. In addition, they must submit their VAT returns to HMRC using MTD compliant software via a digital link. This is intended to construct a complete and transparent digital journey, making it easier to narrow the tax gap.
HMRC offers a definition on their website of what a digital link could be, which is broader than you might expect:
emailing a spreadsheet containing digital records so the information can be imported into another software product;
transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to someone else who then imports that data into their software;
XML, CSV import and export, and download and upload of files;
automated data transfer;
HMRC also accepts that manual adjustments may at times be required, but these must be reflected in the accounting software.
Of course, these latest developments have broad implications on software requirements. One concern is that HMRC has not released compatible software itself, but has instead published a list of software developers that can offer compatible software, whilst encouraging businesses to look closely at their current procedures and software capabilities. For some, this could mean drastic changes to processes and software in order to remain compliant.
It is worth noting that there is some flexibility for VAT-registered businesses that have a taxable turnover under £85,000. These businesses will have to follow MTD rules for their first return starting in or after April 2022. However, businesses below the £85,000 threshold have the option of voluntarily joining the scheme earlier than 2022. In an article published by the government at the beginning of March 2021, it says that “about a quarter of VAT registered businesses below the VAT threshold have voluntarily chosen to join MTD, demonstrating that a modern, digital approach to managing tax can work for businesses of every size.”
Making Tax Digital Going Forward
In July 2020, the government set out a timetable for fully rolling out MTD across individuals and corporations. This means that the self-employed, landlords or tradespeople who usually submit a self-assessment tax return with annual business or property tax income above £10,000 will be required to participate in the MTD scheme from their first accounting period beginning on or after 6 April 2023. Exact details are still to be revealed, however, it is already known that the annual tax return will be replaced by four quarterly submissions plus a final adjustment submission. Currently, the government is also in ongoing consultation about how MTD will work for corporation tax and has stated it will not mandate usage of the scheme for this purpose until 2026.
More information about the MTD scheme and how it is set to develop over the next few years can be found on the government’s website here.