On April 1st, a new regulation comes into effect, changing how VAT-registered businesses manage their taxes and make their tax returns to HMRC. Making Tax Digital (or MTD) for VAT promises to make life easier for everyone, but do you understand what changes are on the offing?
MTD for VAT is only part of a new initiative from HMRC designed to make the process of making VAT returns more efficient, as well as reducing the risk of errors. Incorrect tax calculations are estimated to cost the Exchequer as much as £9billion every year.
The initiative applies to businesses with a taxable turnover above the £85,000 VAT threshold. These businesses are now required to keep their records digitally and file VAT returns using HMRC compatible software. And while a ‘soft landing’ policy is being applied by HMRC, the new system will become mandatory in April 2020.
The main thrust behind MTD is to digitize all records relevant to your business’s tax matters, ensuring the necessary documents are readily on hand and a clear ‘digital journey’ is available, while also drastically reducing the chances of human error on calculations.
But there is more to it. That’s why we’ve put together this short list of facts you should know as the Making Tax Digital deadline approaches.
5 Things You Need To Know About MTD
Because all submissions will now be made digitally, the MTD initiative makes it necessary to adopt reliable software, like our own invoice processing automation solution Kefron AP which integrates with HMRC-compatible software.
This will significantly lower any time pressure to meet tax return deadlines because there will be no manual data entry. Time traditionally spent focused on file-filling will now be freed up for staff to focus on more productive pursuits.
To comply with Making Tax Digital, it’s necessary to store records digitally. So, for any relevant paper documents – like invoices – document scanning is necessary.
The HMRC has pointed out that transactions must also be recorded digitally, stating that “any data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records”.
That means that every piece of software must be digitally linked to other pieces of software to “create the digital journey”.
The introduction of the Making Tax Digital initiative brings to an end the need to report your business’s financial performance through the traditional tax returns procedure. The dreaded forms will no longer need to be filled in but will mean greater attention to providing information via software.
The new way involves submitting updates digitally to HMRC a minimum of four times a year through your registered digital tax account. So, every 3 months, you can use your software to send income and expenses summary to HMRC. The end-of-year tax figure, based on your provided information, can be viewed as an estimate at any time through your tax account.
HMRC says that they will now be able to collect and process the information that is provided through the course of the year, making tax updates virtually real-time. The result is that companies will not have to wait until the end of the year to learn how much tax is due, or is outstanding.
To learn more about how Accounts Payable Automation can help your business, please click here.
To learn more about Making Tax Digital, please click here.