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.
In this white paper, we will provide all of the necessary information needed to prepare for tax season, including:
- MTD guidelines
- Policy changes
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.
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.
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.
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