Common misconceptions about Making Tax Digital
Following numerous webinars and talks around the country we set out below the most common misconceptions about MTD.
- Businesses below the VAT threshold will need to comply with MTD for VAT
- The VAT threshold will be reduced to drag more businesses into MTD Businesses will have to keep electronic copies of all documents
- Paper records are adequate so long as the totals are recorded in MTD compliant software
- Businesses will have to keep electronic copies of all documents
- HMRC will receive details of each and every transaction In practice, it will not be possible to use spreadsheets to comply with MTD
- Free software will be available
- Digitally excluded businesses will be forced to comply
- Businesses on special schemes or who have made particular arrangements with HMRC will not be able to comply
- Agents are being side-lined by HMRC and won’t have the access they need to act for their clients
- Paper records are adequate so long as the totals are recorded in MTD compliant software
- Businesses will need to make quarterly payments of income tax
- MTD for income tax will not go ahead
Businesses below the VAT threshold will need to comply with MTD for VAT
Exactly which businesses are in scope for MTD for VAT; how will those outside the scope comply if the current online VAT return disappears?
VAT registered businesses with taxable turnover below the VAT threshold (frozen at £85,000 until April 2020) can continue to use the current online VAT return to file their returns; this option will be blocked to those within scope. HMRC will be encouraging businesses below the threshold to opt in to MTD for VAT but there is no obligation.
When working out taxable turnover you should:
- include standard rated, reduced rated and zero rated supplies and
- exclude outside the scope and exempt supplies
The relevant period to be considered is the same rolling 12 months that applies when considering whether a business must compulsorily register for VAT. This will need to be monitored from April 2019 (particularly for voluntary registered businesses that have not opted into MTD for VAT).
Once a business is required to comply with MTD for VAT the requirements continue even if the turnover of the business subsequently drops below the VAT threshold.
Note that, for MTD for VAT, businesses includes sole traders, partnerships, charities and limited companies.
The VAT threshold will be reduced to drag more businesses into MTD
My business currently trades below the VAT registration threshold and it not expected to grow significantly in the next five years. The government plans to reduce the threshold meaning more small businesses will be required to comply with MTD for VAT.
It is correct that the VAT threshold is being used to determine which businesses will have to comply with MTD for VAT from April 2019. The VAT threshold is frozen until April 2020 and the government issued a call for evidence on the VAT threshold in December 2017, following a review by the Office of Tax Simplification. Any decision on reducing the VAT threshold will be based on many factors and a large body of evidence and not with a view to bringing more businesses into MTD for VAT. Indeed, it is entirely possible that MTD for VAT could be made compulsory for all VAT traders with no change to the threshold.
Paper records are adequate so long as the totals are recorded in MTD compliant software
If a business keeps good paper records (eg, using Simplex or some other such system) surely the agent (or the business itself) can take the totals from those records, enter then into MTD compliant software and the business will then be compliant with MTD.
This is incorrect. With some very limited exceptions, each and every transaction must be recorded electronically. Taking totals from paper records and recording those totals electronically does not meet the requirements of MTD.
The VAT regulations require a separate electronic record for each VAT supply made or received. The regulations do allow multiple supplies on a single invoice to be recorded as a single supply, subject to certain conditions. Recording totals from paper records electronically does not meet this requirement and record keeping penalties could apply.
A relaxation to allow those accounting for VAT using a retail scheme to keep a record of Daily Gross Takings (note daily, not weekly or longer) rather than a separate record of each supply making up the Daily Gross Takings is contained in the VAT notice.
The VAT regulations state that ‘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.’ We await further detail on the circumstances where this might apply but possible situations might include; petty cash, employee expenses, cases where a third party such as an event organiser keeps the records and provides the business with summary information only.
Note that, contrary to what some have been saying, it is not “illegal to keep paper records”. The records would have to be entered entry by entry into software which is likely to be very inefficient but is not illegal.
Businesses will have to keep electronic copies of all documents
Businesses will have to scan and keep an electronic copy of all documents not already in digital format.
This is incorrect. There is no requirement to scan or keep electronic copies of documents. The regulations specify the information that is required to be kept electronically (essentially the prime entry records) but copies of documents are not included in this list. The existing regulations that cover retention of records continue and include the requirement to keep copies of documents but these can be paper copies.
HMRC will receive details of each and every transaction
The MTD updates that are sent to HMRC will include details of each and every transaction and HMRC will use this information to initiate investigations.
This is incorrect. The information to be submitted to HMRC will be the same as it is now. For VAT that is one total figure for each of the 9 boxes on the current VAT return. For income tax it is either the three line account totals or totals for each category on the SA103F or SA105 for property. The requirement to record each individual transaction digitally is separate and distinct from the requirement to submit information to HMRC – the submission requirement is for totals only. HMRC will not be able to see whether each transaction has been digitally recorded separately. Future compliance checks may well start with a request for a download of the digital accounting records and there are penalties for not keeping the required records.
There may, in time, be an option for businesses to submit additional voluntary information to HMRC and some businesses may choose to do this to speed up repayments or to avoid the need for HMRC to ask questions.
In practice, it will not be possible to use spreadsheets to comply with MTD
It will not be possible to use spreadsheets to meet MTD requirements for record keeping and submitting information to HMRC because suitable software products won’t be available.
The draft regulations for MTD for VAT specify that VAT returns will need to be filed using ‘functional compatible software’. Although the definition of this term does not specifically refer to the use of spreadsheets the examples in the draft VAT notice and the addendum to the notice include a number of scenarios where spreadsheets are used. This is expected to be made clearer in the final version of the notice.
Businesses and agents that wish to use spreadsheets for record keeping and submitting information to HMRC will need to acquire a bridging product from a commercial software supplier. This software product will provide the necessary link between existing client spreadsheets (which may need some minor modification such as a new ‘front sheet’) and HMRC systems. HMRC expects that the market will provide spreadsheet bridging products and there are informal indications from at least one software company that they will be doing so. These products are unlikely to be free. Alternatively, it is technically possible to develop a spreadsheet that is API enabled and we are aware that a large accounting firm is considering developing and marketing such a product.
We do expect spreadsheet products to be made available, if only because the accounting software products available are unlikely to cover all sectors and sizes of businesses that will be within scope for MTD for VAT (especially for businesses on margin schemes). In particular, groups and complex businesses that need to combine information from a range of different software and which need to make adjustments such as for partial exemption are likely to use a spreadsheet and a bridging product. It will be acceptable to use a suite of software and spreadsheets in this way but the links between these must be digital (from April 2020, an additional year has been given to allow for legacy systems to be updated and for all manual links to be converted to digital).
Some members have asked when HMRC will be releasing APIs that businesses and agents can use to make their current spreadsheets MTD compatible. Some agents and businesses (generally the largest and most complex) may choose to register with HMRC as software developers and develop their own bespoke MTD compatible software or spreadsheets but that is not likely to an option for most. To gain access to HMRC’s API platform a software developer has to register as such with HMRC and have appropriate skills.
HMRC will publish information to enable businesses and agents to make software choices (including bridging software) for MTD for VAT but can only do so once the relevant software product is available in public beta (ie, available to all). The list of providers for MTD for income tax was published when the pilot went into public beta but the range of providers is currently very limited.
The fact that it will be possible to use spreadsheets is welcome and there will be many businesses who would not be able to comply without using them. However, the bridging software is likely to come a cost which may not be dissimilar to the cost of the least expensive software packages. Given that spreadsheets are inherently more prone to error and do not provide a future-proofed solution, it may be better to move clients to a software solution.
Free software will be available
Businesses and agents will be able to make use of free software to meet MTD requirements
For businesses it depends; it is extremely unlikely that any provider will make free software available to agents.
Income tax: the government has given an undertaking that there will be free MTD for income tax software for the most straightforward businesses (ie, those that do not require VAT or PAYE functionality). HMRC will not be developing this software itself unless perhaps the market does not respond and provide some free products – HMRC currently expects that it will.
VAT: the government has made no commitment to provide free software for MTD for VAT so it depends on the whether the market provides free products.
Digitally excluded businesses will be forced to comply
Many businesses will not have the necessary digital skills or access and will be unable to comply.
There will be exemptions for the digitally excluded; these are enshrined in law. The exemptions cover those who that do not use computers for religious reasons and those who are unable to comply because of age, disability or location (or for any another reason). The exemptions mirror the current exemptions from online filing for VAT. Existing digital exclusion exemptions for VAT are likely to be carried over to MTD for VAT. Those who are not currently exempt from VAT online filing may find it more difficult to persuade HMRC that the exemption should apply. Difficult cases will arise, particularly when it comes to MTD for income tax, where an individual has some very basic digital skills such as being able to send emails but would not be able to cope with accounting software or a spreadsheet. There is no specific age at which the exemption applies; each case will be taken on its merits. Location covers those who cannot obtain access to broadband because of where they are located. The exemption will not apply to those who could sign up for broadband but have not done so.
Businesses on special schemes or who have made particular arrangements with HMRC will not be able to comply.
There are many special schemes for VAT: flat rate and margin schemes, cash, annual and monthly accounting and non-standard VAT periods. MTD for VAT will not accommodate these or partial exemption calculations.
All of these special schemes and arrangements will continue when MTD for VAT is introduced, nothing is changing in that respect. Whether the software market will provide products suitable for all businesses on these schemes is a separate question. In particular, it is doubtful whether products that are suitable for those on margin and second hand goods schemes will be commercially viable. Such businesses may need to use a combination of a software product and spreadsheet(s). Adjustments, including partial exemption calculations, do not form part of the records that must be kept digitally; in most cases these calculations will be done outside of the digital records with a journal being made for each type of adjustment. Businesses that have a bespoke arrangement with HMRC (such as to accommodate 13 4-week period in each year) will need to discuss that arrangement with HMRC.
Agents are being side-lined by HMRC and won’t have the access they need to act for their clients
HMRC is seeking to cut out agents and transact directly with businesses.
For the first time in recent HMRC history MTD for income tax and VAT functionality is being provided to agents at the same time as it is being provided to businesses. All UK based agents can now set up their agent services account in preparation for MTD. Overseas agents will have access in time for MTD for VAT becoming mandatory in April 2019. Existing client relationships for income tax and VAT can be copied across to the new agent services account.
Some agents have encountered issues with setting up their agent services account (ASA) and it is recommended that agents set up their account now even if they are not planning to join the MTD pilots immediately. Any issues with setting the account up are specific to the firm and should be resolved by contacting HMRC. Some tips:
- take care what email address you use to set up the ASA, choose one with some permanence
- make sure that you record the new government gateway USER ID and the agent reference number that are allocated during the process or you won’t be able to get back into the account
- each firm will and can have only one ASA and it is linked to the firm’s UTR, even where there are multiple offices. You may find that the ASA has already been set up to access the Trust Registration Service – this is the same account that will be used for MTD and all new agent services
- a word of reassurance – setting up the ASA and copying client relationships across does not affect access to existing agent services through the government gateway agent portal
HMRC still a lot of work to do on other agent services but for MTD for business access is being granted as we would wish.
Businesses will need to make quarterly payments of income tax
Businesses will have to make payments based on their quarterly updates for income tax.
There are no current plans to alter payment dates for VAT, corporation tax or income tax. HMRC did consult on a voluntary pay as you go process in 2016 but this has not been taken any further.
MTD for income tax will not go ahead
In July 2017 the government changed the timetable for MTD and the focus is now on VAT starting from April 2019. I haven’t heard anything more about MTD for income tax. Has it gone away?
MTD for income tax is expected to go ahead. The pilot moved to public beta in March 2018 and is expected to be expanded gradually. The primary legislation has been enacted. The ministerial statement of 13 July 2017 stated that ‘The Government will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest.’. A ministerial decision is required before MTD is extended beyond VAT. It is not clear how far ahead of the mandation date a decision and announcement would be made; this could mean further slippage beyond 2020 and political events could intervene.
Mel Stride (Financial Secretary to the Treasury) was quoted (in early 2017) as saying “what I’m very keen to signal to everybody out there… is that we are serious about it and it will happen, so there will be no question of any further delay on this, so we all need to make sure that we’re ready for it.” - a clear statement of intent.