Countdown to ‘Making Tax Digital’: What you need to know

Content from our United Kingdom office from our UK office

The MTD deadline is looming: On April 1, 2019, the UK Government introduces one of the biggest changes to the tax system in recent years. The Making Tax Digital legislation requires that companies maintain digital accounting records and use these to submit information to HMRC (HM Revenue and Customs).

Initially, this applies to VAT but the end-goal is to roll this approach out to all areas of tax-related accounting. So what does this mean for your business and how does it impact expense management?

Here’s everything you need to know:

What is Making Tax Digital?

This is an HMRC initiative, first announced in 2015, that aims to simplify and streamline the UK tax system.

The original plan was to introduce digital record-keeping and quarterly submissions for income tax, VAT and corporation tax by 2020. After a consultation, this was changed to a more phased approach. Now, the initial MTD changes initially only apply to VAT.

This means that, from April 1, 2019, all registered businesses above the tax threshold of £85,000 will have to keep digital records and submit their VAT information via compatible software.

Does MTD apply to my business?

If your business has a taxable turnover above the VAT registration threshold of £85,000, then you will need to comply with the new MTD regulations. The requirement will remain even if your turnover subsequently falls below that threshold and will only end upon deregistration.

It’s important to note that the threshold figure is calculated on a rolling 12-month basis, rather than being based on turnover in a calendar year. So it’s something that companies need to constantly monitor.

Are there any exemptions?

Yes, there are some exceptions that remove MTD obligations. These are if:

  • A business is subject to an insolvency procedure
  • Religious beliefs are incompatible with electronic communications
  • It’s not ‘reasonably practicable’,  due to age, disability or remoteness of the location

Businesses will need to contact HMRC to apply for one of these exemptions. Otherwise, all types of businesses are included in the MTD regulations, including charities, local authorities, trusts, etc.

Note: Businesses that are exempt from the Making Tax Digital rules can still choose to opt-in by informing HMRC in writing before the start of the next tax period.

When does MTD start?

The rules apply from your business’s first VAT period, starting on or after April 1st, 2019. The ‘VAT period’ refers to the inclusive dates that are covered by your VAT return. An additional 12 month ‘soft landing’ period has been created to allow VAT related software and processes to be handled digitally.

The deadline for MTD has also been deferred by six-months for businesses deemed to have ‘complex requirements’. This affects the following categories:

  • Trusts
  • ‘Not for profit’ businesses (not set up as a company)
  • VAT divisions
  • VAT groups
  • Government departments
  • NHS Trusts
  • Local authorities
  • Public corporations
  • Traders based overseas

It’s estimated that this will cover around 40,000 businesses. For these, the MTD deadline moves to October 1st, 2019.

What are the main changes?

MTD relates to the way that VAT information is delivered to the tax authority. This can no longer be handled manually, with details being input by a finance team via the HMRC’s online portal.

The data must be submitted using an automated process and via a compatible software system. The exact wording of the legislation is: “The electronic account must be kept and maintained using functional compatible software.”

HMRC has made it clear that VAT doesn’t have to be handled by a single piece of software. As long as there are adequate links, multiple digital systems, tools and accountancy packages can be used.

The key criteria are that a VAT operation can:

  • Record and store VAT records in a digital form
  • Submit VAT returns via HMRC’s online portal
  • Receive data and information from HMRC

Where software is not able to perform all of these requirements, it may be used in conjunction with other packages, what’s referred to by HMRC as ‘bridging’ software.

The types of digital links accepted include:

  • Application Programming Interface (API) transfers
  • XML and CSV imports and exports
  • Linked cells on a spreadsheet
  • Emailed data which can be automatically uploaded
  • Transfers via memory stick or portable device

What’s not permitted is any kind of manual or ‘cut and paste’ methods to move VAT related data between the various systems and software packages that are being used within a business.

How does this affect employee expense management?

The impact of MTD will vary depending on the method your business is currently using to manage its employee expenses.

If your business uses a cloud-based system, the changes required for MTD will be minimal. It means that you already have the tools and processes in place to fully comply with the requirements.

If, however, your business uses a more traditional approach - relying on paperwork, spreadsheets, and manual processes - then meeting the MTD requirements will pose more of a challenge.

Expense management software

For companies using a cloud-based approach to expense management, the main task will be to ensure that any VAT related data can be shared with MTD compatible accounting software.

This needs to be an automated process with no information having to be manually inputted by finance professionals. Most expense management solutions will already be fully compatible with all of the major accounting packages.

To help provide companies with sufficient time to ensure that all of the digital links and ‘bridges’ are in place between systems, HMRC is providing a 12 month ‘soft landing’ period.

This means that businesses will have until March 30th, 2020 to ensure digital connectivity
throughout their processes. This applies to everything other than the final submission to HMRC - this must be done online and via compatible software from April 1st, 2019.

Manual expense management

The specific aim of MTD is to move businesses away from any reliance on paper-based and manual ways of handling information. So for businesses who currently use a traditional approach to expenses, meeting these new requirements is problematic.

The regulations require that each and every transaction is recorded digitally. Handling information manually and then adding totals into a digital system doesn’t meet the requirements of MTD.

Neither does the use of digital spreadsheet tools such as Excel unless there’s a way to automatically share the information collected.

Whether any records at all can be paper-based within a compliant accountancy process is open to interpretation. The MTD regulations state: "The list of information that must be kept electronically may be varied by the Commissioners in cases where the Commissioners are satisfied that keeping and maintaining information as specified in this regulation is likely to be impossible, impractical or unduly onerous."

Whether the ‘impossible, impractical or unduly onerous’ exemption could be applied to the large volumes of paper receipts and associated paperwork that’s associated with expense management remains to be seen.

In practice, however, any reliance on manual or paper-based processes is becoming increasingly unworkable as the tax authorities continue to push for a fully digital process.

While the ‘soft landing’ period and legislative interpretation may provide some ‘wiggle room’, the ultimate solution is for businesses to move away from the traditional approach to expense management and to switch to an automated cloud-based system.

What are some general tips for VAT compliance?

While MTD changes the way that information is submitted and stored, the fundamental needs for VAT compliant accounting of expenses remain the same. Here are some general rules:

Maintain an effective expense policy

Employees should be given clear guidelines on exactly what can and cannot be claimed. This is particularly relevant for VAT compliance and the need to prevent blurring the lines between personal and business related costs.

Make use of digital mileage tracking

Using a digital tool to record business mileage helps to provide the level of detail required when claiming VAT for fuel. The Webexpenses app integrates with Bing Maps for point-to-point recognition and accurate distance calculation.

Ensure items are accurately categorised

A cloud-based system allows VAT reclaim to be automatically calculated. However, this relies on each and every cost that’s claimed being accurately categorised. A particular risk is the use of any kind of ‘miscellaneous’ categories to cover a range of expenses.

Add explanatory notes to expense claims

Claimants should be encouraged to add notes to expense reports to help verify the legitimacy of business costs. A digital approach makes this quick and simple with notes able to be added via the smartphone app.

What are the MTD benefits of digital expense management?

An effective expense management system will allow manual and paper-based processes to be virtually eliminated. It does this by allowing employees to instantly convert any paper receipt they receive into a digital form.

A system such as Webexpenses uses the most advanced OCR (Optical Character Recognition) technology to scan and digitise all of the relevant information on a receipt.

This allows for a streamlined process in which manual tasks are replaced with automated management and storage of expense information.

In terms of VAT, the system will:

  • Create digital records of expense date, amount and category
  • Work out the amount of VAT reclaim
  • Allow splitting of recoverable and non-recoverable elements
  • Seamlessly integrate with MTD compatible software