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Making Tax Digital (MTD) – FAQ’s

Our Managed Services team, have put together some FAQ’s based to help you understand and prepare for Making Tax Digital (MTD) for VAT.

Q: What is MTD?

Making Tax Digital (MTD) is HMRC’s plan to revolutionise the UK tax system. This will make administration more efficient and will affect the way businesses and individuals keep records.

MTD is starting with VAT records in April 2019. Then will later move onto income tax, partnerships and corporation tax reporting on a quarterly basis, but not until at least 2020.

Q: When does MTD start?

The first business mandated for MTD for VAT will have a taxable turnover above the VAT threshold of £85,000 per annum. Their first VAT return caught by MTD will be the one commencing on or after 1 April 2019, unless they are exempt from MTD, or fall into the category of deferred businesses.

Q: What are the MTD exemptions?

The key MTD exemption is on the grounds of Turnover.

With effect from 1 April 2019 is your taxable turnover is below the VAT registration threshold (currently £85k) you will be exempt. However, you will need to monitor your turnover and once in MTD you stay in MTD, even if your turnover falls below the threshold in future years.

There are three additional exemptions from Making Tax Digital

1 – Your business is run entirely by practicing members of a religious society whos’ beliefs are incompatible with the requirements.

2 – It’s not reasonably practicable for you to use digital tools for reasons of age, disability, remoteness of location or any other reason.

3 – You are subject to an insolvency procedure.

Even if you are exempt, you can still choose to join MTD.

Q: What is a deferred business for MTD?

A very small number of businesses who are over the VAT threshold for taxable sales have been deferred for joining MTD for VAT, these are:

Those entities will include trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (Government departments, NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.

Q: What is a digital link?

A digital link is simply the transfer of data from one place to another. HMRC envisage that from the point you record your sales and purchases at the transactional level, all the way through to the VAT return they receive, the information will have flowed digitally (sometimes referred to as the ‘digital journey’). This means not having been summarised for posting into software or having been manually typed out or written.

Examples of allowable digital links between records for MTD are:

  • Emailing a spreadsheet
  • Linking cells from one spreadsheet to another
  • Transferring onto a portable device (e.g. pen drive, usb stick, etc)
  • Excel, CSV or XML export and import
  • Automated data transfer

Please note that ‘cut and paste’ doesn’t constitute a digital link and therefor is not allowed for MTD.

Q: What is an API?

An Application Programming Interface (API) is best described as a ‘secure digital tunnel’, through which digital records can be transferred. It is through and API from your accounting or bridging software that HMRC will receive the digital VAT records from you.

Q: I am a VAT registered academy, will I be caught by MTD?

For academies please see this page.

Q: My turnover is less than £85,000 per annum, do I have to comply with MTD?

No. Not unless you have already been caught by the turnover test (std +r educed + zero rated sales above the VAT registration threshold) and previously had a requirement to comply. Once you are in MTD for VAT you stay in, no matter how far your turnover falls so long as you stay registered for VAT.

However, in future we MTD for income tax and corporation tax is likely to go to a much lower turnover level.

Q: Does HMRC need to received details of every transaction?

No.

Under MTD for VAT, HMRC will still only receive the 9 lines of the VAT return information that you would normally submit. However, if you subsequently receive a VAT inspection then you can expect to be asked for the backing detail behind the numbers submitted.

Q: Do I have to scan all my invoices?

No, you don’t. But you do need to keep a record of those transactions in a digital form.

Q: I normally post from statements, is this allowed?

Supplier statements had been a grey area for some time, however the following rule has been added to the MTD legislation:

“Where a supplier issues a statement for a period you may record the totals from the supplier statement (rather than the individual invoices) provided all supplies on the statement are to be included on the same return and the total VAT charged at each rate is shown”.

Q: What about petty cash transaction for MTD?

The rules on petty cash have also been updated by HMRC to include the following:

“Where a business uses petty cash to pay for small value items, these do not need to be individually recorded in the digital records. The business can record the total value and the total input tax allowable. This applies to individual purchases with a VAT-inclusive value below £50 and the total value of petty cash transactions recorded in this way cannot exceed a VAT-inclusive value of £500 per entry.”

Q: What is MTD bridging software?

Bridging software is a way of getting your VAT return information to HMRC digitally. The bridging software should also be able to receive messages back from HMRC. This is an alternative to submitting data directly to HMRC through a piece of accounting software.

Q: When would I need bridging software?

You would need to use bridging software for MTD if you choose to keep your electronic records in excel or some sort of spreadsheet rather than accounting software.

You may also need to use bridging software if you are in a VAT group and/or keep records in more than one system. Ultimately, you have to digitally link the information for your VAT return from the multiple sources into a spreadsheet, which you can then upload/link to HMRC via the bridging software.

Q: How do I choose which bridging software to use for MTD?

HMRC publish a list of bridging software providers, but ultimately the choice is yours, here are a few thoughts on some things to consider when choosing bridging software

Bridging software tends to fall into two main types:

  • Excel/spreadsheet plugin
  • Cloud website/upload
  • Accounting software linked (e.g. where you are an accountant with multiple clients)

Some of the advantages of the cloud upload are:

  • Not reliant on a local installation of the plugin
  • Not reliant on a single computer if it fails
  • Accessible from anywhere
  • No downloading of ‘updates’ required

Some other issues to consider:

  • Are you using terminal services? In which case a plugin bridging software would have to be possibly deployed to all staff
  • Does your bridging software support your chosen software (e.g. PC vs MAC)
  • Where is the data stored by the supplier for data protection purpose
  • Support available from the supplier
  • Price


Q: What is a digital tax account?

This is a place where HMRC will hold all the tax records for a taxpayer or tax paying entity. HMRCs vision is that holding the records in one place will give greater transparency on both sides, allow you to see how your tax is calculated and plan for tax payments.

Q: I don’t understand Making Tax Digital what do I do?

Give us a call and we will see how we can help guide you through.

See for yourself, and find out how we have helped Luis McCarthy from J.MAC in preparing his business for Making Tax Digital

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