The Government has taken a new initiative in recognizing Making Tax Digital. The initiative puts forth a clear and unique vision for the digital tax system. The aim of this is to make it simpler and hassle-free for individuals and businesses to get and pay the tax right and keep the right track of their affairs. Since it is new for many businesses, there are too many grey areas and ambiguities too.
What is ‘Making Tax Digital’ for VAT?
The Government has changed the way in which VAT registered businesses submit their VAT Returns. And this is done as a part of their Making Tax Digital (MTD) plans to modernize that is, digitalize the tax system. This is what ‘Making Tax Digital’ or MTD basically means.
AIM of Making Tax Digital
The objective of MTD is to create one of the globe’s most digitally advanced tax systems. It allows firms and self-employed to address their income tax returns digitally and send directly to HM Revenue and Customs from their own software. By requiring firms and individuals to maintain digital records for self-assessment and to file this digitally every three months. Its main motive is to bring an end to the yearly self-assessment income tax return.
The government administration says the majority of clients want to get their tax right, but many find this challenging. Going digital, strengths to improve and increase efficiency and lessen the amount of tax lost to these avoidable errors.
With all these advantages, HMRC says making tax digital will create transforming tax administration more efficient and more productive. The government agency says it will make paying tax easier for an individual who has to pay their taxes themselves and make sure they get their taxes right.
Who does it affect?
There are actually a couple of factors we need to consider in order to know whether you’ll be impacted by MTD or not. That being said, it totally depends on how much your annual turnover is. You are required to keep digital business records for VAT if your taxable turnover is above the VAT registration threshold (which is currently £85,000). Also, you need to make a valid submission of these records and send returns using Making Tax Digital (MTD).
Now for businesses with a taxable turnover below the VAT threshold, it is completely voluntary decision to sign up for Making Tax Digital (MTD) for VAT. But, it’s always wise to align with MTD when you have good future planned for your business. This is also applicable to other VAT entities such as charities, government bodies and most limited companies with lesser turnover.
How does it work?
Making Tax Digital for VAT includes adopting software that connects to HMRC’s Application Programming Interface (API) through a digital link so the data doesn’t need to be rekeyed in order to file the tax returns. Once connected, people upload digital VAT returns and other required information to a portal and send it to the government department. Using this software, firms keep digital records of this data and do mail reports to HMRC every three months.
Individuals set to be affected by Making Tax Digital for income tax can sign up to a pilot scheme to test the service. This enables them to test out this way of working out their tax charges and observing an estimation of how much tax they might owe over time, instead of waiting until the end of the income tax year. Being a part in the pilot scheme involves using software to link to HMRC and sending income and liabilities summaries to the government department every three months. It helps individuals finalize their income and liabilities at the end of the accounting year. People receive notifications when updates need to be sent. There’s also an option to send updates directly to HMRC more regularly if a person prefers.
HMRC- Proper and Compatible Software is Essential
Making Tax Digital is as much about developing new skill as it is digitalization. Proper software is crucial because it’s required to be compliant with MTD. As this software links up to HM Revenue and Customs, it needs to be compatible with the government department’s systems.
Thus this allows individuals to keep digital records and send tax returns directly to HMRC without rekeying the information. There is a broad array of software available, with some still in development, which is compatible with MTD for VAT and for income tax.
For individuals and companies who store their records in a spreadsheet format, and don’t need innovations like those noted above, bridging software is an option to consider. It links non-compatible software, such as spreadsheets, to HMRC’s systems. While being a lot affordable, it is still compliant with Making Tax Digital software specifications. If you’re not convinced what type of software to purchase, many software companies offer a free trial, so you can see what’s best fitted to your company requirements.
Income Tax theft is more productive than you might consider. In the initial year of implementation of MTD for VAT, HMRC said it would practice a light approach to penalties for delayed filing and record-keeping flaws for companies trying to secure a digital link. However, this is for those companies that are doing their best to comply. Those businesses that are seen not to be doing their best to comply with VAT filing and record-keeping could be given a penalty.
Although, you must also always ensure that you pay your VAT bill on time. If you haven’t registered the VAT return compliantly and you haven’t cleared it on time, you would likely receive a penalty notification. To avoid the risk of any possible penalties, it is best to comply once MTD applies to you.