A government-led initiative, it represents a seismic shift that will ultimately affect everything from micro-businesses to the country's largest corporations.
Its introduction will be phased in. From April, firms with a turnover above the VAT threshold will be required to keep digital records and provide quarterly VAT returns via MTD-compatible software. Businesses below the threshold will have longer to prepare. No date has been fixed, but those turning over between £10,000 and £85,000 may be obliged to comply as early as 2020.As a Lancashire-based practice, we receive enquiries from all sorts of businesses, and what most concerns us about MTD is how unprepared many companies appear to be. MTD is real, it is happening, and like any aspect of the taxation system, firms absolutely need to work with it.
With just a few short weeks before its formal introduction, it's essential that firms understand its requirements and plan accordingly.What's driving it?
The stated aim of MTD is to introduce a fully digital system that makes tax administration more efficient and easier for taxpayers. Its purpose is to enable businesses and HMRC to calculate taxes throughout the year. Since HMRC will process data in near real-time, firms shouldn't see their tax bills mounting unexpectedly.The importance of MTD shouldn't be underestimated. It will give HMRC direct access to much more granular financial data, potentially enabling radical changes in the way that it handles companies' returns. It's conceivable, for example, that algorithms could eventually replace some human interventions, delivering 24/7 scrutiny of routine tax returns as well as supporting more detailed investigations. It's arguably the biggest single change to the taxation system since the introduction of self assessment in 1996.
Preparations
For HMRC's part, preparations are well advanced. Every UK taxpayer now has access to a digital account that they can use to check and manage their details. Firms using reputable accountants should see no great challenges - aside from the new quarterly-reporting requirement. Any good practice will already have adopted MTD-compliant systems. Likewise, those using well known accounting packages (Sage, Xero, FreeAgent etc.) should see a relatively easy transition because their developers have been working hard behind the scenes to accommodate MTD's requirements.However, there are companies that could struggle to take their accounting online. Those still using paper-based systems or manually updated spreadsheets will face significant challenges. HMRC has confirmed that basic spreadsheets can be used, but they will need to be used in conjunction with approved conversion software. Learning the necessary procedures should not be left to the last minute. MTD will usher in significant changes, and inadequately prepared businesses could see serious disruption to their operations. VAT-registered traders who are unsure about their readiness should therefore seek immediate professional advice.