Making Tax Digital: How to follow UK VAT guidelines

Britain’s on a mission.

For what? To have one of the most advanced tax systems in the world.

...Doesn’t sound like a very exciting mission, we get that. But the changes the UK is putting into place actually constitute a modern revolution of how business is managed.

What that practically entails is bringing _all _tax-related activities into the digital realm: bookkeeping, accounting, reporting, filing, and more. This transition is what Making Tax Digital aims to do over many years.

The UK is starting the MTD transition by first focusing on Value-Added Tax. VAT compliance with new MTD policies started in April 2019 and continues to evolve. Once VAT is complete and all the kinks ironed out, the process will move on to other forms of tax in the UK.

Slowly but surely, all individuals and businesses will be pushed into the 21st century and beyond, never to look back.

This introductory installment of MTD is huge news for businesses, because it impacts not just how you operate during tax season, but how you run your business on the day to day. We mean from bookkeeping to accounting, on up to those VAT returns.

(If you need a refresher, read about the difference between bookkeeping and accounting and why you need both!)

Here we answer your questions about why the change is happening, how you must comply, and how you can expect to benefit. Allow us to break it down for you.

Why did the UK government introduce MTD?

Aside from bragging rights for having a world-leading tax system, the UK hopes to accomplish several practical improvements by moving all tax processing online. Here are the concerns and benefits the government has in mind:

Save money

The HMRC hopes the digital system will save money by preventing tax fraud and minimizing honest errors. Both issues contribute to about £13B in missing VAT, each year!

Policies have already been put in place to combat Missing Trader Intra-Community (MTIC) fraud and to make sure online marketplaces are held liable for the VAT compliance of businesses who sell on their sites. MTD should help monitor and enforce these laws.

Otherwise, a whopping £6.5B is due to human error, be they poor administrative procedures or miscalculations and typos. Manual compliance provides ample opportunity for mistakes. Humans make mistakes! But ensuring all records are logged digitally and transferring automatically should reduce these mistakes and ultimately save everyone money, including you!

Improve communication and transparency

HMRC’s other stated goal is to improve its communications with taxpayers. MTD provides a direct way for HMRC to pass information back to you, to send you updates and alert. It also allows you to access your own financial reports and records more easily, without bureaucracy getting in the way. (i.e.- No more long waits on the phone!)

Manage taxes in real time

Since all records and data will be digital, the British tax system will operate closer to real time, processing returns much faster.

This prevents tax owed from building up and tax refunds from being delayed. You won’t have to wait so long to find out how much money you have to pay, or how much money you’ll get back. A quicker turnaround gives you more financial clarity and allows you to budget more accurately.

Which businesses does Making Tax Digital apply to?

The MTD for VAT transition applies to VAT-registered businesses in the UK. If you sell digital products to customers in Great Britain, you must register for VAT in the UK.

If you sell other types of products, it depends on your sales volume. If your annual turnover is under the £90,000 threshold, you’re exempt from Making Tax Digital. Once you surpass this, you are required to register.

How to calculate your annual turnover? From the current reporting month, you should predict your UK sales for the next twelve calendar months.

If the total passes £90K, then you should register for VAT in the UK (if you haven’t already) and begin to follow MTD guidelines. VAT registration and the Making Tax Digital rules will affect how you run your business, from bookkeeping to filing tax returns.

If you’re curious what your VAT obligations will look like once you register, HMRC released a digital tool to help you estimate this. It’s called the VAT Registration Estimator.

What is Making Tax Digital in the UK?

The gist of HMRC’s Making Tax Digital is that any data that informs your taxes, in any way, must be recorded and stored in a commercial software. Here’s what some are referring to as the “digital journey” within MTD. It outlines three main requirements of compliance.

1. All data must be recorded digitally.
2. Transfer of data from one system to another must be done digitally.
3. Submission of tax return to HMRC must be done via HMRC’s API. ^*

All data must be recorded digitally

This means you can manage your bookkeeping and accounting via commercial software. You’re able to use your own spreadsheets, but those spreadsheets must be API-enabled, or you have to eventually import those spreadsheets into some kind of software anyway. See next point ;)

Transfer of data from one system to another must be done digitally

This means you can’t manually copy-and-paste any data from one place to another (from a file to a software, for instance). Transfers should be done by API.

Submission of tax return to HMRC must be done via HMRC’s API

The final submission of data absolutely must be done by API, without human involvement. With MTD, gone are the days where you type in the tax return answers on the HMRC portal; it’s filled for you automatically.

^* Quick tech note: HMRC currently has an XMP API. However, to accommodate the big switch to digital, it’ll be replaced with a JSON API. JSON allows for more efficient processing of large volumes of data.

What should your business record digitally?

As mandated by MTD, your business should record a certain set of data from each transaction, and then store this information digitally. If you currently use software for your business taxes, then all of this data is probably recorded for you already!

Business name Address of business VAT number of business Accounting schemes used (e.g.- Annual, Cash, Flat Rate) VAT Account Total of adjustments or corrections made Date of supply Net value (tax exclusive) VAT amount VAT rate If you’re using the Retail scheme, include Daily Gross Takings

Not surprisingly, this list is similar to the information required on a tax receipt, also known as a “full invoice”. Not familiar with those? Read more about tax receipts and how they function as legal documents.

What kind of software should your business use?

No, this is not the place where we plug using Quaderno! HMRC actually has a few stipulations when it comes to the commercial software you use.

1. First (and most obvious) is that your software must record the above data in a digital form.
2. Second, the software must be configured for the HMRC API.
3. From the digital records, the software must create a VAT return which can be sent via API. You should be able to submit this on a voluntary basis (not just when filing period closes).
4. In turn, the software must be able to receive information from HMRC. This is the two-way communication bit that HMRC is aiming for!

How does your business file VAT according to MTD?

The HMRC expects “quarterly updates generated and sent direct from the software the business/agent uses to keep their records.” If you’re a mixed taxpayer, or you have any exemptions, then these adjustments can still be done manually.

What should you do now?

Reading this article was the first step. Now you should take a moment to understand the needs and requirements of the policy more in depth. From there, you can assess which parts of your business process are manual. Does your bookkeeping need to change? Figure out what you need to change or add to your business to make the journey digital.

And finally, plan for software adoption! If you don’t already use a tool, have a look at our guide about how to choose the right accounting software for your business. In any case, you’ll want to make sure the software has plans to comply with MTD and HMRC’s API.

Best of luck, and we’ll keep you updated!

Resources

• Overview of Making Tax Digital, from UK government
• Making Tax Digital Myth Buster (PDF)