Are you ready for MTD ? What is MTD for VAT and does it affect your business ?
MTD is an acronym for Making Tax Digital. It is a governmental initiative that requires businesses store their financial data as well as process and submit their taxes digitally. It affects VAT and income tax. Admittedly, it can be confusing and hard to understand for business owners exactly what their obligations will be under the new rules. However, the purpose of this governmental initiative is to streamline the process of processing and submitting tax returns, because not only that incorrectly filed taxes cost the government several billion pounds per year, but they cause businesses disruption, stress and possible fines.
VAT is an acronym for Value Added Tax, a type of tax that businesses whose annual turnover is greater than £85000 are required to collect from customers on behalf of HMRC. The standard rate of VAT is currently set at 20% of the price of an item. This means that if you want to get £100 for a product you wish to sell, and you are VAT registered, you will have to add VAT on amounting to £20 pounds. This further means that you will actually sell it to your customer for £120, then you will send £20 to HMRC and keep the £100.
With respect to MTD for VAT, it deployed in two stages. The first stage rolled out on 1 APR 2019, requiring all businesses whose turnover is above £85000, and are therefore VAT registered, to store digitally their financial records relating to VAT and to submit their VAT return online using HMRC-approved accounting software. The second stage will roll out on 1 APR 2022 and will require all VAT registered businesses regardless of their turnover (even those whose turnover is below the £85000 threshold) to comply with MTD (i.e. store their financial records relating to VAT digitally and to submit their VAT return online using HMRC-approved accounting software).
In brief, there are two essential elements to MTD:
• Businesses and organisations (which includes those with income from property) are required to maintain digital accounting records. Maintaining paper records ceases to meet the requirements of the tax legislation.
• Businesses and organisations are required to use a functional compatible software product to submit updates and returns to HMRC. The current HMRC online tax return services for the relevant tax are withdrawn when a business signs up to MTD.
How to become MTD compliant ? You will have to install and use an HMRC- approved accounting software to store your financial data and to calculate and submit your tax returns. Accountants must ensure that suitable software is in place before they sign a client up for the MTD service. Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.
by Laura Sterian
LAS Accounting Ltd