There is no doubt that Making Tax Digital (MTD) has been one of the most significant disruptions in the world of accounting – affecting businesses and accountants alike.
Now that we all have been following MTD VAT and MTD ITSA closely, it is vital to plan for these changes. In this blog post, we look at recent updates in MTD VAT and MTD ITSA and how you can get a jumpstart on those changes:
Old VAT portal closes in a push to move the UK towards MTD VAT
HMRC has confirmed in a recent note that they will be closing the old online account for VAT by the end of October 2022. That means that VAT-registered businesses will now have to use MTD-compatible software to file their monthly and quarterly VAT returns, or face penalties.
The decision comes as a part of HMRC’s campaign to make MTD VAT business as usual for the UK. Companies that joined MTD VAT in April 2022 now have a tight deadline to stay compliant or face the consequences.
There are only two exceptions to the new rule.
Digitally excluded businesses do not have to use the MTD portal. However, they need to apply for an exemption from using software – the tax department is processing these exemptions as quickly as possible, and the old online VAT account will remain open for businesses with outstanding applications.
In addition, while the online account will officially close on November 1, 2022, businesses that file annual returns can continue to use it until May 15, 2023.
Use the software or get penalised.
Jim Harra, HMRC CEO, announced that it is in the best interests of VAT-registered businesses to start using MTD-compatible software as soon as possible, stating that failure to do so could attract penalties from January 2023.
This could take the form of a default surcharge, late submission penalties, and interest. Companies that have not yet signed up for MTD VAT are first asked to choose an MTD-compatible software option, sign up, and submit returns from November 1, 2022.
So far, over £15 million worth of returns have been submitted via MTD, while over a third of eligible businesses signed up with MTD voluntarily before mandation. However, many UK businesses continue to resist the change and have not been thinking about MTD even though they are VAT-eligible.
Once the old portal is closed, they will have no option but to use MTD-compatible software, which could be a struggle for some. To address this, the HMRC has stated that it will increase its direct communication efforts with businesses that need help with the transition.
An HMRC spokesperson mentioned that they have written to every customer warning them of the fact that the online VAT portal will no longer be operational after October and that companies that have not yet signed up will automatically be migrated. This is to avoid situations where companies mistakenly file their returns through the old portal and are given penalties.
Relief for those operating under the “Help to Grow” scheme
Moreover, under the Help to Grow: Digital scheme, businesses that have not yet signed up can get 50% off on MTD-compatible technology up to £5000. While it was earlier accessible only to businesses with up to five employees, it is now open to those with up to 249 employees and buying the software for the first time.
The scheme has been well-received, although it has faced some criticism for listing only a limited number of participating vendors.
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MTD for ITSA: More changes enter the picture
By now, UK accountants everywhere are aware of the new MTD for ITSA requirements, which will come into full effect from April 2024. It was conceived by the HMRC as a way to combat the tax gap caused by human error and is being pushed widely through several legislative requirements that have been coming into play throughout 2022.
Many of these notices have been criticised for being unclear in their wording, so it is understandable if you do not quite know how they apply to you. Here, we break down some of the most recent updates released by the HMRC for the benefit of eligible businesses:
Draft notices on MTD ITSA
The HMRC shared four notices on July 1, 2022 under the powers outlined in The Income Tax (Digital Requirements) Regulations 2021:
- The first one lays out the two categories of unincorporated businesses that fall under the purview of MTD ITSA. One is businesses with property income, and the other is businesses with trading profits exceeding £10000.
- The notice specifies that businesses need to mention the total amounts falling under each transaction category in their quarterly returns. An exception is made for businesses below the VAT registration threshold – they can just report the total of their incomes and expenses.
- The second one lays out the extra information that needs to be shared for each source of income that falls under the scope of MTD ITSA. Essentially, these cover the tax adjustments that have to be made to the accounting profits to assess the final taxable profit figure.
- The third one describes specific rules by which retailers can record their daily gross sales figures rather than noting each transaction separately.
- The fourth one touches on the ‘digital links’ requirement and specifies that all business records must be stored on functional compatible software right from the moment of transaction entry until the returns are submitted to HMRC.
Some issues not addressed with MTD for ITSA
Even though there are several areas on which the draft notices are silent, such as how EOPS will interact with the “final declaration” and what are the MTD filing requirements for property businesses, HMRC is looking to scale up their pilot for MTD ITSA in the coming year. Further guidance is expected to be published later in the year.
Get all the help you want for MTD VAT and MTD ITSA
Accountants are also encouraged to help their clients understand each new HMRC notice and plan how it will affect their business, including which MTD-compatible software to invest in. That is why we at Bradleys Accountants want to give you a helping hand if you are struggling with MTD VAT.