HMRC's Making Tax Digital initiative bestows obligations on those falling within it to complete certain tasks digitally, whereas they may currently choose to do so using pen and paper. These requirements fall broadly into two categories:
- digital record keeping; and
- digital submissions.
What HMRC mean by these, and what the legislation requires, have evolved throughout the duration of this project and we seek to clarify them below.
One of the main aspects of MTD is that digital records need to be maintained.
There's been some confusion about what 'digital record keeping' actually means. Many businesses already keep digital records, either by spreadsheet or via a software solution. Both of these are still acceptable forms of digital record keeping.
Both our MTD for VAT solution, VAT Filer, and our MTD for ITSA solution, Business Filer, maintain a digital link with an underlying bookkeeping spreadsheet before submitting a summary of that information to HMRC. They both meet all of HMRC's digital requirements.
If you would like to download a sample spreadsheet that you can use for recording your transactions digitally, either for VAT, ITSA or both, then we have these available for free on our Knowledgebase site.
The advantages of digital record keeping
All businesses can benefit from using software or spreadsheets to keep digital records.
Not only can this help you run your business more effectively, it can also:
- Reduce avoidable errors that can occur when manual calculations are performed, or information is transposed by hand
- Reduce the risk of unwelcome and costly HMRC compliance interventions
- Keep your records up to date if you have an electronic copy of invoices and receipts
- Make it far easier to share your records with your accountant/agent, saving both time and costs, and allowing you to focus on growing your business.
For MTD for ITSA (Income Tax Self Assessment) the minimum information to be recorded is the date, amount and category of each business transaction. It is not required to submit full transactional data to HMRC, only a summary of the quarterly totals.
For MTD for VAT, you will also need to record the rate of VAT charged. Full details of the MTD for VAT requirements can be found in HMRC VAT notice 700/22. Unfortunately, no equivalent guidance notice currently exists for MTD for ITSA; although we are continuing to press HMRC to release one.
What type of software should I use?
You don't need to use a 'cloud based' application. As long as the information is recorded electronically and any shared information is transferred digitally, the application can be desktop-based, i.e. held on a local machine or network.
You don't need to use the same software as your accountant. But any information that's shared between yourself, your accountant and HMRC must be made digitally.
You don't need to keep a digital, or scanned, copy of your invoices and receipts; although you may choose to do so if you wish.
Under MTD for ITSA there are 3 key types of digital submission:
- Quarterly (or periodic) update: This is the summary of your quarterly bookkeeping transactions that you need to submit at least every 3 months. You can submit more frequently should you wish to do so.
- End of Period Submission (EOPS): This is your final annual accounts figures which have been subject to any tax and accounting adjustments to give your taxable profit from self-employment and/or property.
- Final declaration (or crystallisation): This is your confirmation of all income received and allowances claimed for the tax year, including non-business and property income.
TaxCalc has solutions to support you with all three digital submissions. Business Filer is our new MTD for ITSA bridging solution and upon release will allow our customers to submit quarterly submissions to HMRC. The capability to submit End of Period Submissions and the Final Declaration will reside within our existing Tax Return Production solution.
No more Tax Return
Any individual falling under the MTD for ITSA regime will no longer receive, or be required to complete, a Self Assessment tax return in the current SA100 format.
Although the mechanism for submitting tax information to HMRC will change, there is currently no change to the calculation of tax, nor the frequency with which tax is paid over to HMRC, whether you fall under MTD for ITSA or not.