What is Making Tax Digital?
Making Tax Digital (MTD) is the HMRC’s (UK government) new initiative to make it easier for businesses to get their tax records up to date. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. MTD is making fundamental changes to the way the tax system works, to make it:
- More efficient
- More effective
- Easier for taxpayers to get their tax right.
VAT registered businesses with turnover above the VAT threshold (£85,000). This includes unincorporated businesses, partnerships, companies, LLPs, trusts non-UK businesses registered for UK VAT and charities.
VAT registered businesses with turnover below the VAT threshold can opt into MTD and file their returns using MTD compatible software but there is no obligation to do so.
Businesses and organisation within scope will have to keep digital records and submit VAT returns using functional compatible software from the start of their first VAT return period beginning on or after 1st April 2019.
What are the benefits of MTD?
At the basic level, HMRC’s plans make sense. We already use the internet for a variety of things from grocery shopping, online banking and communicating with government.
Relying on paper and submitting a single return once a year leads to mistakes and can be riddled with hidden costs (see hidden costs of AP blog). A small mistake in the ledger can snowball into a serious discrepancy over time.
HMRC estimates that the Exchequer lost £8 billion a year due to avoidable taxpayer mistakes. “In 2014-2015 over £3.5 billion of HMRC revenue was lost due to these mistakes in VAT returns alone.”
With cloud technology and accounting software mistakes can be picked up on almost immediately and corrected at their source before they have the chance to snowball into bigger errors. Accounting software is real-time, therefore the business will know how much it owes in various taxes on a month by month basis, allowing business owners and executives to make business decisions with more information and more confidence.
What is the timeline for implementation of MTD?
- VAT - April 2019
- Income Tax - Not before 2020
- Corporation Tax - Not before 2020
There are no changes to what information is recorded and submitted to HMRC - the only changes is how the information is sent to HMRC. The information must now be submitted through the HMRC tax portal via API connected software.
What do Accountants & Bookkeepers need to do to get ready for MTD
Even if you already use accounting software in your practice, it needs to be MTD compatible. This means it needs to have an API integration with HMRC’s new MTD portal. Which of your clients is already using MTD software? Popular software providers who are supporting MTD include:
A full list can be found on gov.uk here
Lightyear’s impact on MTD?
Lightyear is fully compliant with MTD requirements.
As Lightyear sends accounts payables data into accounting software, the accounting software then formats this data along with the business’ full accounting data for submission to the HMRC tax portal.
Example of how Lightyear works with MTD?
Bills are emailed to your company’s Lightyear email address (firstname.lastname@example.org) where Lightyear will then strip out the line-item detail from the bill, price checking each line item and verifying the tax has been applied correctly. This data is then sent into your accounting software via an API connection or desktop sync. Your accounting software then includes your account payables data along with your other accounting data for submission to HMRC tax portal.