MAKING TAX DIGITAL (MTD) is here and despite the change in legislation, many contractors are still unaware of what MTD is, what it means and how it will impact them.
After 1 April 2019, businesses that are VAT-registered were required to store records digitally and automatically submit VAT returns to HMRC through accounting software compatible with MTD.
What is MTD?
First announced in the 2015 Spring Budget, MTD is designed to revolutionise the UK tax system for individuals and businesses.
It’s estimated that £9.4 billion in tax revenue is missing because of errors or incorrect submissions, so the government aims to reduce this by ensuring the submission of quarterly tax reports and the storage of crucial documents and records – all of which are to be filed in digital form.
How do you know if you need to start complying with MTD?
If your business has a taxable turnover above the VAT threshold, currently set at £85,000, you will need to start using MTD-compliant software to manage the financial side of your business. From April 2020, businesses must submit income and corporation tax, on top of VAT, through this software.
The benefits of MTD
- Through MTD, all records will be stored digitally instead of on paper or on Excel spreadsheets, meaning calculation errors are easier to correct.
- MTD helps businesses stay organised, submit documents in a timely manner, and view information in real time, which can help when it comes to decision-making in your business. HMRC will collect and process your information throughout the year, so you’ll always know how much you owe – and if you need to budget for any tax liabilities.
- MTD saves time; there is less paperwork to do because HMRC is kept up to date with certain key information. As MTD is a digital account, it is also linked to the government, making direct communication between them and your business is easier than ever.
- MTD will streamline the recording process and give you an accurate view of your tax information in real time.
What happens if you don’t comply with MTD?
Individuals and businesses that refuse to keep records digitally through an MTD-compliant software will incur a default surcharge which is in place until April 2021. After this date, this surcharge will be replaced by points-based late-submission penalties and late payment penalties.
The amount of surcharge owed is calculated as a percentage of the VAT that’s unpaid by the due date – the percentage for the first late payment during this surcharge period is 2% of the outstanding VAT, a fee that will increase to 5%, 10% and 15% for further payments.