Three major changes will be introduced to existing Making Tax Digital (MTD) regulations in April 2020. These involve digital bookkeeping, the digital journey made by your financial records, and penalties. 
Making sense of MTD 
MTD is a government initiative to streamline tax administration using more effective, efficient and easy systems. 
 
Since 1 April 2019 businesses registered for Value Added Tax (VAT) have had to submit their returns using ‘functional compatible software’ or through the HMRC Government Gateway. 
 
On 1 April 2020, the second phase of MTD for VAT begins, introducing several new measures that small businesses could find challenging. 
 
Digital bookkeeping 
Businesses based in the UK will be required to keep digital records. The Office for National Statistics says that there are currently 2.72 million VAT-registered businesses or registered employers. 
 
Although almost all VAT returns are already submitted online, only around one in 10 are submitted using compatible software. The rest are entered manually through the HMRC Government Gateway. 
 
From next month small businesses that currently keep paper records or Excel spreadsheets will need to digitise their records of sales, purchases, fixed asset transactions and stocks, including the time of supply, VAT rate and value. 
 
If your business is investing in an accounting package for the first time, you should choose one that will also meet MTD filing requirements. 
 
The digital journey 
Moving information between accounting and invoicing systems will also need to be digital from April. Manually consolidating information, making corrections, and cutting and pasting must all be phased out. This will be especially important if your business has several groups of accounts or accounting systems that need to be consolidated. 
 
You can only continue with your current method if you can show that the digital journey from your invoicing or accounting systems to the bridging software and on to HMRC is uninterrupted. 
 
Penalties 
Penalties for late or inaccurate MTD returns have been suspended since April 2019 to give businesses time to implement the system. From April 2020, this will be lifted so businesses could face significant financial penalties. 
 
There will be a two-tier system and penalties will be enforced within 15 days of overdue tax payments. The penalty system is based on the number of offences during the year. They can reach 15% of the VAT due, plus fines of up to 100% of undeclared VAT as a result of careless or deliberate inaccuracies. 
 
MTD for individuals 
It isn’t compulsory, but self-employed people and landlords can sign up for a digital tax return pilot scheme. You can then keep your records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return. 
 
Both sole traders with income from one business and landlords who rent out UK property (excluding furnished holiday lettings) can sign up. 
 
To take part you must use compatible software and send an income and expenses summary to HMRC every three months. You will then be able to see estimates of how much tax you owe. Your final report at the end of the year will be used to calculate your total tax bill and you will be able to claim any allowances and relief. 
 
MTD for Corporate Tax is expected, but we don’t know when yet. The earliest it could be introduced is 2021. 
 
 
If you would like some advice about what MTD means for your business or about suitable accounting software, please get in touch
Tagged as: MTD
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