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The revolution in business tax is coming


Theresa Middleton

Director of Making Tax Digital for Business

From 1st April 2019, all businesses above the VAT threshold will need to keep their records digitally and submit their VAT return using software as part of Making Tax Digital (MTD).

Millions of us are already banking, paying bills, and interacting with customers and suppliers online. Going digital with business records and taxes is the next step to businesses getting more control over their business and their finances. 

We know the vast majority of people want to pay what tax they owe, but too many often struggle to do so, with honest errors accounting for a large proportion of the tax gap figure – over £9 billion in 2015-16. The tax gap is the tax that should – in theory – be collected, against what is actually received and is money that would otherwise go towards paying for the UK’s public services.

By further digitising the tax system, we want to help businesses to significantly cut down on these errors.

The move to digital integration will make filing taxes feel like a by-product of running their business finances, helping them to be more effective and efficient, allowing businesses and their agents to devote more time and attention to more important business matters.

No change to ‘what’ information is provided, just ‘how’

The first step to achieving this will be submitting VAT returns using software. From 1st April 2019, all VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) will need to keep their records digitally and send us their VAT return data from that software.

Those businesses that are registered for VAT but are below the VAT threshold are not required to use the MTD service, but can choose to do so.

This is a change for many businesses, who will in future need to keep their records digitally (using software or an app) and use that software to send us their VAT returns. But they will not need to provide more information, nor provide it more regularly, than they do now.

We are currently testing our VAT service with volunteer businesses and agents and plan to open the pilot more widely in the coming months.

Move to quarterly summaries for Income Tax

Our pilot for Income Tax is now open for self-employed businesses to join, and will be available for landlords in the coming months. By using software to keep records digitally, and submit a quarterly summary of income and expenses and an end of year report, businesses  will have more confidence that that they have got their tax right. They will also receive tax calculations during the year, helping them to plan and manage their cashflow more effectively.

What businesses and their agents should do

We want to help businesses and their agents get ready for the change. They can start preparing for the VAT move now by:

  • looking at how they can keep their records digitally, if they don’t already keep them in this way.
  • asking their software provider about when their software will be MTD compatible, if they currently use commercial accounting software.
  • (for agents) creating an Agent Services account to enable them to sign clients to MTD as well as access MTD on a client’s behalf. Information on creating an Agent Services account is available on GOV.UK.
  • (for more complex businesses) looking at their internal business operations to ensure their end-to-end process is digital.

We are working to build a list of compatible MTD software for VAT, which will be published on GOV.UK once the current private testing phase of the pilot is complete.

It may also be beneficial for those who are required to use MTD for VAT to also join for income tax on a voluntary basis. Depending on the software businesses choose, MTD will make it easy to generate this information at the same time as a VAT return is prepared, harmonising and consolidating a business’ interaction with HMRC.

Clients of agents will not necessarily need to use the same software – lots of software products have been designed to work together – but the movement of VAT related business tax information between client, agent and HMRC must be digital.

Getting involved in the VAT pilot when it is opened up later this year will help a business prepare for the changes sooner, while for HMRC, the pilots for both VAT and Income Tax enable us to shape the service based on feedback from the pilot volunteers. For agents it will give them more time to sign-up their clients rather than a rush to do this all at once.

We are introducing MTD on a voluntary basis for most businesses and only require our VAT customers above the VAT threshold, who already interact with HMRC quarterly and digitally, to sign-up from April 2019. In this way we are smoothing the transition to a modern, digital tax system.

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