Making Tax Digital (MTD) FAQ’s
Making Tax Digital (MTD) – Frequently Asked Questions (FAQ’s)
Have you seen the TV adverts or heard the radio adverts and have questions regarding the UK Government initiative to “make tax digital”?
Or, have you had one of the “letters of encouragement” (the Governments words, not ours) to join MTD?
You may be asking yourself “do I need to sign-up for making tax digital” or “do I need to buy software for making tax digital”? There are many questions the MTD scheme has raised, especially for small business owners and even more especially for those just under, or just over, the VAT threshold.
Don’t Panic – Help is at Hand
Getting the wrong side of the “VAT Man” can give many business owners sleepless nights.
Using computers and software fills many people with dread.
Please don’t panic or worry? Help is at hand.
Firstly, the HMRC are going to be “considerate” with companies that are doing their best to comply, even if they are not fully compliant.
HMRC knows businesses will require time to become familiar with the new requirements. During the first year of VAT mandation, HMRC will take a light touch approach to penalties by not issuing filing or record keeping penalties where businesses are doing their best to comply with MTD.
gov.uk/government/news/making-tax-digital-becomes-law
HMRC recognises that businesses will require time to become familiar with the new requirements of MTD. During the first year, following the introduction of MTD, HMRC will take a “light-touch approach” and will not issue record keeping and filing penalties where businesses are doing their best to comply with the law.
If a business receives a penalty of any other type, for example for late payment or for inaccuracy, and believes the failure was due to problems arising from the transition to MTD, they have the right to appeal against the penalty and all relevant factors, including any transitional issues, will be taken into consideration.
Secondly, more practical advice and guidance are available. Ever since the new rules were first announced in 2015, the team at Hayvenhursts have been familiarising themselves with the rules and how to comply with them. We consider ourselves experts in terms of making tax digital. We are happy to provide guidance on yours, or your businesses, situation free of charge.
MTD For VAT in the UK – Let’s Explain The Jargon!
It can be so easy to misunderstand the jargon, so let’s start by explaining the terminology being used.
What is Making Tax Digital?
Making Tax Digital, very often shortened to “MTD” is a plan by HMRC to streamline information to the “Tax Office”. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works – transforming tax administration so that it is more effective, more efficient and easier for taxpayers to get their tax correct.
At the moment, MTD is only being applied to VAT.
Why are the Government Moving to MTD?
Keeping records on paper and submitting VAT returns to HMRC manually results in errors – in a YouGov poll, 61% of businesses said they have previously lost receipts. Errors also occur in the manual transposition of data and manual calculations.
MTD offers a more integrated approach to business administration and tax, reducing the time businesses spend on administration in the longer term and making it easier for them to get their tax right.
It is thought the introduction of MTD will also streamline processes within HMRC, reducing overhead costs.
Frequently Asked Questions
When Did Making Tax Digital Start?
Businesses that are required to submit a VAT return will have to do so for their first full VAT quarter after the 1st April 2019.
This means that if your normal return included May 2019 and your new quarter started in 1st June 2019 – by the 7th October 2019 you must be submitting your VAT return via the MTD process.
It is currently planned that “Income Tax” will come under the MTD mandate from April 2020
I Add My Figures Online, Am I Not Doing It Digitally?
Most businesses, or their Agents, enter the information for VAT returns online on the HMRC portal.
However, the records to calculate that information is recorded manually. The Government believes that up to £9Billion a year is lost to the Treasury with errors made by “manual” record keeping.
VAT filing must now be done via MTD-compatible software, so cannot be done online and manually via HMRC’s website (or via paper forms-based filing).
Will Making Tax Digital Add Costs To My Business?
There are MTD-compatible solutions available at no or low cost for most businesses – indeed there are already over a dozen products that are available for free, with varying conditions of use.
Many accountants, including Hayvenhurst, use “bridging software” to allow you to keep records on a spreadsheet and still comply with the MTD process.
Costs will differ from business to business and are influenced by the size and complexity of the business and their degree of digital capability, as well as the type of functionality they want their software to include.
Most businesses will be able to claim any costs for hardware and software against their tax.
Do I Need Additional Software to Comply With Making Tax Digital?
If you and your business have been happily calculating the VAT owed in a spreadsheet, or even in a ledger, for years you may be concerned that you have to have new software to comply with MTD.
The good news is that you don’t.
Many Accountants, including Hayvenhursts, have “bridging software”. This software can use the information in a spreadsheet, convert it and upload it to the MTD website, making you compliant.
If you are using ledgers, unfortunately, you will have to move with the times a little and start adding the data to a spreadsheet. Which is actually just as easy as keeping paper records.
If you do keep records on a spreadsheet or want more information on our bridging software, then please make contact with us at Hayvenhursts and one of our friendly staff will explain how it works. Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD appraisals and advice consultations.
What Information Do I Need to Record For MTD?
There are 9 boxes that need to be completed to submit via MTD. These are a summary of the information required.
The nine boxes on the VAT return are:
- VAT due on sales and other outputs
- VAT due on acquisitions from other EC member states
- Total VAT due (the sum of 1 and 2)
- VAT reclaimed on purchases and other inputs (including acquisitions from the EC)
- Net VAT to be paid to Customs or reclaimed by you (Difference between 3 and 4)
- Total value of sales and all other outputs excluding any VAT
- Total value of purchases and all other inputs excluding any VAT
- Total value of all supplies of goods and related costs, excluding any VAT, to other EC member states
- Total value of acquisitions of goods and related costs, excluding any VAT, from other EC member states
You only need to add information to the boxes that relate to your business.
You also need to record, but not report, the time of supply, the cost of supply (excluding VAT) and the rate of VAT charged. “Supply” is the sale of a product or service. For most businesses, this information is recorded on the invoice to the customer.
Making Tax Digital and Keeping Digital Records?
If you are keeping a record of sales in a ledger or perhaps using a paper invoice book then you do need to consider how you are going to keep digital records.
A simple spreadsheet with a record of the sale such as the date, customer name, invoice value (excluding VAT), and the VAT rate charged is sufficient.
If you are producing electronic invoices then this information is a digital record. A summary of those invoices is required.
Many accountants, including Hayvenhursts, have “bridging software” that will upload the information from your spreadsheet to HMRC, making you compliant with MTD.
If you are utilising one of the many “accounting software systems” then this information is recorded digitally. Most of this software is compatible with uploading the information required for MTD.
What is the Threshold for MTD?
Currently, only information relating to VAT returns need to be digitally recorded and uploaded.
If you are above the £85,000 VAT threshold, then you must comply with MTD.
The current time schedule is for “income tax” to be included in the MTD mandate from April 2020, so it is advisable to start recording this data digitally as well.
I Am Just Below the VAT Threshold, What Should I Do?
Businesses below the VAT threshold can voluntarily apply to be “VAT registered”
There are benefits to registering for VAT if you are just below the £85,000 threshold. One of those is the benefits of the “flat rate scheme” for VAT.
The “flat rate scheme” allows small businesses to charge the client the full VAT rate (currently 20%) yet only pay HMRC a percentage of that. This is to help smaller businesses with costs of administration.
| Category of business | % Payable |
| PayableAccountancy or book-keeping | 14.5 |
| Advertising | 11 |
| Agricultural services | 11 |
| Any other activity not listed elsewhere | 12 |
| Architect, civil and structural engineer or surveyor | 14.5 |
| Boarding or care of animals | 12 |
| Business services that are not listed elsewhere | 12 |
| Catering services including restaurants and takeaways | 12.5 |
| Computer and IT consultancy or data processing | 14.5 |
| Computer repair services | 10.5 |
| Dealing with waste or scrap | 10.5 |
| Entertainment or journalism | 12.5 |
| Estate agency or property management services | 12 |
| Farming or agriculture that is not listed elsewhere | 6.5 |
| Film, radio, television or video production | 13 |
| Financial services | 13.5 |
| Forestry or fishing | 10.5 |
| General building or construction services | 9.5 |
| Hairdressing or other beauty treatment services | 13 |
| Hiring or renting goods | 9.5 |
| Hotel or accommodation | 10.5 |
| Investigation or security | 12 |
| Labour-only building or construction services | 14.5 |
| Laundry or dry-cleaning services | 12 |
| Legal services | 14.5 |
| Library, archive, museum or other cultural activity | 9.5 |
| Management consultancy | 14 |
| Manufacturing fabricated metal products | 10.5 |
| Manufacturing food | 9 |
| Manufacturing that is not listed elsewhere | 9.5 |
| Manufacturing yarn, textiles or clothing | 9 |
| Membership organisation | 8 |
| Mining or quarrying | 10 |
| Packaging | 9 |
| Photography | 11 |
| Post offices | 5 |
| Printing | 8.5 |
| Publishing | 11 |
| Pubs | 6.5 |
| Real estate activity not listed elsewhere | 14 |
| Repairing personal or household goods | 10 |
| Repairing vehicles | 8.5 |
| Retailing food, confectionery, tobacco, newspapers or children’s clothing | 4 |
| Retailing pharmaceuticals, medical goods, cosmetics or toiletries | 8 |
| Retailing that is not listed elsewhere | 7.5 |
| Retailing vehicles or fuel | 6.5 |
| Secretarial services | 13 |
| Social work | 11 |
| Sport or recreation | 8.5 |
| Transport or storage, including couriers, freight, removals, and taxis | 10 |
| Travel agency | 10.5 |
| Veterinary medicine | 11 |
| Wholesaling agricultural products | 8 |
| Wholesaling food | 7.5 |
| Wholesaling that is not listed elsewhere | 8.5 |
An example of how the “flat rate scheme” works:
Say you repair appliances, such as washing machines, and you fall under the category of “Repairing personal or household goods” – then you would charge the homeowner 20% VAT, however, you only need pay HMRC 10% of the invoice (excluding VAT).
Cost of repair (excluding VAT) £100
VAT (at 20%) £20
Total Bill to the Homeowner £120
The VAT payable to HMRC £10
There are however other considerations before deciding to become VAT registered. Assuming that your margins are already “tight” you will need to pass on the additional 20% to public clients. For regular clients, this may feel like an increase in doing business with you.
In the example above, the person getting their washing machine repaired will feel as though they are paying £20 more than they are used to.
If you have flexibility in your margins, you may choose to lower the cost excluding VAT, lowering the overall “bill” to the customer.
The washing machine repair could be:
Cost of repair (Excluding VAT) £90
VAT (at 20%) £18
Total Bill to the Homeowner £108
The VAT payable to HMRC £8
If you are supplying goods or services to a VAT registered company then they will reclaim the VAT as part of their return and will not be overly affected by you registering and charging VAT.
Making “income tax” digital will affect nearly everyone from April 2020, so it is advisable to start keeping digital records now.
Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD and VAT appraisals and advice consultations.
I Am Just Above the VAT Threshold, What Should I Do?
If your business revenues are above the £85,000 threshold or you believe your revenues will hit the threshold within the next 30-days, you are obliged to register for VAT and you must comply with MTD.
You have to register within 30 days of the end of the month when you went over the threshold.
You can apply for a registration ‘exception’ if your taxable turnover goes over the threshold temporarily.
If your revenue drops during the year and you fall below the threshold, at any point after 1 April 2019 you are still required to continue to keep digital records and send HMRC your VAT returns using MTD.
Hayvenhursts offer all potential clients a free consultation and VAT Healthcheck and are happy to offer free MTD and VAT appraisals and advice consultations.
Will Making Tax Digital Affect Me?
If your business revenue for the last year was over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and comply with making tax digital.
If you currently pay VAT then you must comply with making tax digital.
If you are below the VAT threshold and do not pay VAT then making tax digital will not affect you.
Making “income tax” digital will affect almost everyone from April 2020, so it is advisable to start keeping digital records now.
Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD appraisals and advice consultations.
Is Making Tax Digital Compulsory?
If your business revenue for the last year was over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
If you currently pay VAT then making tax digital is compulsory.
If you are below the VAT threshold and do not pay VAT then making tax digital is not compulsory, but voluntary.
Making “income tax” digital will affect nearly everyone from April 2020, so it is advisable to start keeping digital records now.
Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD and VAT appraisals and advice consultations.
Does Making Tax Digital Apply To The Flat Rate Scheme?
If your company is on the flat rate scheme it will need to make returns digitally and comply with MTD. However, the scheme and the rate you pay to HMRC are unaffected. It only changes how you communicate with HMRC.
Does Making Tax Digital Apply To Limited Companies?
If your limited company had revenues for the last year over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
If you currently pay VAT then making tax digital is compulsory.
If you are below the VAT threshold and do not pay VAT then making tax digital is not compulsory, but voluntary.
Making “corporation tax” digital will affect limited companies from April 2020, so it is advisable to start keeping digital records now.
Hayvenhursts have a suite of software solutions perfect for limited companies and with management reporting and financial management systems.
Does Making Tax Digital Apply To Sole Traders?
If as a sole trader you had revenues for the last year over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
If you currently pay VAT then making tax digital is compulsory.
If you are below the VAT threshold and do not pay VAT then making tax digital is not compulsory, but voluntary.
Making “income tax” digital will affect sole traders from April 2020, so it is advisable to start keeping digital records now.
What Does Making Tax Digital Mean For Self Employed?
If as a self-employed person you had revenues for the last year over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
If you currently pay VAT then making tax digital is compulsory.
If you are below the VAT threshold and do not pay VAT then making tax digital is not compulsory, but voluntary.
Making “income tax” digital will affect the self employed from April 2020, so it is advisable to start keeping digital records now.
Making Tax Digital For Landlords?
If you are an incorporated Landlord and had revenues for the last year over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
If you an unincorporated Landlord and revenues below £85,000 you do not, at this time, need to comply with MTD.
Revenues will include payments for rent and other services such as landlord certificates or repairs to the property where you have received an income or payment.
If you currently pay VAT then making tax digital is compulsory.
If you are below the VAT threshold and do not pay VAT then making tax digital is not compulsory, but voluntary.
Making “income tax” and “corporation tax” digital will affect landlords from April 2020, so it is advisable to start keeping digital records now.
Hayvenhursts offer Landlords a free consultation and are happy to offer free MTD appraisals and advice consultations.
Making Tax Digital For Small Businesses?
If your “small business” had revenues for the last year over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
If you currently pay VAT then making tax digital is compulsory.
If you are below the VAT threshold and do not pay VAT then making tax digital is not compulsory, but voluntary.
Making “income tax” digital will affect small businesses from April 2020, so it is advisable to start keeping digital records now.
Hayvenhursts offer all small businesses a free consultation and are happy to offer free MTD appraisals and advice consultations.
Making Tax Digital and Charities?
If your charity had revenues for the last year over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
If you currently pay VAT then making tax digital is compulsory.
If you are below the VAT threshold and do not pay VAT then making tax digital is not compulsory, but voluntary.
Hayvenhursts offer all charities a free consultation and are happy to offer free MTD appraisals and advice consultations.
Making Tax Digital and Group VAT?
There is a deferral for VAT groups (as well as trusts, non-profit organisations and various other groups).
VAT groups must implement MTD for VAT with effect from the start of the first VAT return period commencing on or after 1 October 2019.
Most VAT groups record and track VAT on a spreadsheet and manually enter the summary details on the HMRC portal.
From the 1st quarter after the 1st October 2019, this information must be entered in a way that is compliant with MTD.
The good news is that many accountants, including Hayvenhursts, have bridging software to utilise the data in the group VAT spreadsheet and upload the information in a way that is MTD compatible.
Deferral of Making Tax Digital Until October 2019
There is a deferral for VAT groups, trusts, non-profit organisations and
various other groups.
There is a 6-month deferral, until 1 October 2019, for:
● VAT groups
● Trusts
● ‘Not for profit’ organisations that are not set up as a company
● Annual accounting scheme users
● Those required to make payments on account
● VAT divisions
● Government departments, NHS Trusts, local authorities and public corporations
● Traders based overseas
Such organisations and businesses must implement MTD for VAT with effect from the start of the first VAT return period commencing on or after 1 October 2019.
HMRC wrote to all deferred businesses earlier this year (2019). The deferral letter from HMRC instructs the recipient to continue using existing methods to file VAT returns for all periods starting before 1 October 2019. It also exempts the recipient from the requirement to keep digital VAT records.
Making Tax Digital If Not Vat Registered?
If you are below the VAT threshold, and not VAT registered, then making tax digital is not compulsory, but voluntary.
However, if your business revenue for the last year was over £85,000 or will go over the threshold in the next 30-days, then you must register for VAT and making tax digital is compulsory.
Making “income tax” digital will affect the non-VAT registered from April 2020, so it is advisable to start keeping digital records now.
Who Is Exempt From Making Tax Digital?
There is a very small group of people and organisations exempt from making tax digital.
VAT Notice 700/22: Making Tax Digital for VAT section 3 states:
You will not have to follow the rules for Making Tax Digital if HMRC is satisfied that either:
- it’s not reasonably practicable for you to use digital tools to keep your business records or submit your VAT Returns because of age, disability, the remoteness of location or for any other reason
- you or your business are subject to an insolvency procedure
- your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records
You’ll be exempt if it’s not practical for you to keep records digitally because:
- of your location – for example, if you cannot get internet access at your home or business premises and it’s not reasonable for you to get internet access at another location
- of a disability – for example, if you cannot use a computer, tablet or smartphone for the frequency amount of time it takes to keep digital records for your business
You might not be exempt if you:
- believe you should be exempt purely because of your age – HMRC will consider how your age and circumstances impact your ability to follow the rules for Making Tax Digital
- believe you should be exempt because you’re unfamiliar with the relevant software – HMRC will take into account how much you use or intend to use a computer, tablet smartphone or the internet for other purposes and whether it’s reasonable for you to learn how to use Making Tax Digital software
- consider yourself to be a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications – but you’re currently filing online and use a computer or smart device for business or personal use
HMRC will not give you an exemption purely on the basis that reasonable effort, time and cost may be involved in making the transition to Making Tax Digital, for example, choosing and buying any new hardware or software or learning to use them.
HMRC will, however, take effort, time and cost into account in its overall assessment of whether it is practical for you to follow the rules for Making Tax Digital.
Is Making Tax Digital Only For Vat?
Currently, making tax digital only applies to sole traders, businesses and organisations above the £85,000 VAT threshold. This came into effect from 1st April 2019 for most. Deferred groups from 1st October 2020.
Eventually, MTD will be applicable to income tax (planned for April 2020) and corporation tax.
Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD appraisals and advice consultations.
How Will Making Tax Digital Affect Accountants?
Ever since the new rules were first announced in 2015, the team at Hayvenhursts have been familiarising themselves with the rules and how to comply with them.
As we approached the deadline we took practical action to help our clients.
Implementation Strategy – we reviewed each client and their need to comply with MTD. We then devised a strategy with each client so they complied with MTD, without creating additional costs for their business.
Review and Actions – we discussed with each client their current VAT status, the likelihood of any changes in status during the year, how they currently manage their bookkeeping and how this would be affected by MTD. We then put in place an action plan to support them through MTD.
If you feel that your accountant has not prepared your business for MTD or you are still unclear on how you should proceed, feel free to contact Hayvenhursts and let us guide you.
Which Making Tax Digital Software?
Finding the right software for making tax digital is a daunting task. There are over 300 that are MTD compatible. They all have different looks and feels and some are easier to use than others. Unfortunately, choosing the best software for MTD is a personal choice.
If you want to keep things simple and or continue to use a spreadsheet to record your information then bridging software, through Hayvenhursts, is a simple solution.
Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD appraisals and advice consultations.
Making Tax Digital For Vat Free Software?
Finding the right free software for making tax digital is a daunting task. There are 100’s that are MTD compatible and some are free. They all have different looks and feels and some are easier to use than others. Unfortunately, choosing the best software for MTD is a personal choice.
If you want to keep things simple and or continue to use a spreadsheet to record your information then bridging software, through Hayvenhursts, is a simple and free solution.
Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD appraisals and advice consultations.
Can I Use Excel For Making Tax Digital?
If you want to continue to use an Excel spreadsheet to record your information then bridging software, through Hayvenhursts, is a simple solution.
Hayvenhursts offer all potential clients a free consultation and are happy to offer free MTD appraisals and advice consultations.
Making Tax Digital And Brexit?
Brexit will not affect making tax digital, regardless of the outcomes per se. However, if we leave the EU without a deal, the customs, VAT and excise arrangements in place as a result of the UK being part of the EU will no longer apply. The UK would no longer be subject to EU law and new legislation will be needed to replicate the current rules for trade with non-EU countries, ensuring that this also applies to EU trade. VAT and excise legislation will need to be amended to reflect the fact that the UK is no longer part of the EU.
If there is a “no deal” Brexit, it was thought this may affect businesses with their customs declarations.
However, Jim Harra (HMRC Deputy Chief Executive) issued a statement “HMRC already has a system to handle customs declarations in the event of a no-deal exit and is rolling out a new customs declaration service alongside this. In August 2018 it was announced that postponed accounting for import VAT will apply to all imports in the event of a no-deal exit, so businesses will not experience a cash flow disadvantage from changes to VAT rules”.
Making Tax Digital and Petty Cash?
Petty cash is traditionally a small amount of cash on hand that covers day to day expenses of a business, such as buying a pint of milk. In some businesses it can be used to describe costs that are not attributable to an individual account in their records. Requiring businesses to record each of these transactions in digital records could be an unreasonable administrative burden for businesses. Therefore, HMRC will accept that a number of petty cash transactions can be recorded as a single purchase in the digital records of the business, subject to a monetary limit.
The following rule has the force of law:
https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat
Where a business uses petty cash to pay for small value items, these do not need to be individually recorded in the digital records. The business can record the total value and the total input tax allowable. This applies to individual purchases with a VAT-inclusive value below £50 and the total value of petty cash transactions recorded in this way cannot exceed a VAT-inclusive value of £500 per entry.
Help With Making Tax Digital
Haybenhursts offers all potential clients a free consultation and is happy to offer free VAT and MTD appraisal and advice consultations.
Hayvenhursts have their own bridging software which allows them to submit VAT returns to HMRC via many different sources. This bridging software allows reports to be directly imported from software such as Xero and Sage, as well as the direct import of spreadsheets.
If you are being bombarded by your software company to upgrade, or buy their latest software which is MTD compliant, in most cases, Hayvenhursts bridging software allows them to make clients fully MTD compliant without the need for them to go out and spend more money.
To find out more about Hayvenhursts or to arrange a free consultation on making tax digital (MTD) or VAT please telephone 02920 777 756