Making Tax Digital – a transition towards digitization

What is Making Tax Digital?

An HMRC initiative for the UK tax system and ultimately bring an end to Self – Assessment. MTD is a Tax Revolution in the UK. The MTD’s aim is primarily to make Tax administration, a fully digitalized tax system by 2020. Its primary objective is to make the tax system “Effective, Efficient and Easier”. The Secondary objective is to make MTD as a Cost Cutting measure, and finally to cut down the overheads for HMRC for managing Tax affairs. MTD would bring changes in the tax system which will apply to a wide range of taxpayers, including most businesses, self-employed professionals, and landlords. Here comes the challenge where the businesses would now get their records to be digitized and further it requires a Cloud Integration.

Making Tax Digital timeline:

From April 2019, quarterly reporting is:

  • Mandatory for VAT for all registered businesses with a turnover above the VAT registration threshold (£85,000 per annum)
  • Optional for VAT – registered businesses with a turnover below the VAT registration threshold

From April 2020, quarterly reporting is:

  • Mandatory of income tax and corporate tax (as appropriate) for all businesses (including landlords) with a turnover over the VAT registration threshold (£85,000)

Three Steps to going Digital:

1. Digital Records

  • Storing all Transactions in electronic form
  • Cloud Accounting
  • AR and AP data stored in electronic format

2. Digital Link

  • A Digital Link is an electronic or Digital transfer or exchange of data between software programs, products or applications. The use of ‘Cut and Paste’ does not constitute a digital link
  • VAT account – Audit Trial
  • No Human intervention

3. Digital Submission:

  • Access to Digital Tax Account which should provide a live view of all the information
  • Submit your return digitally made using appropriate software with a digital link
  • Receive Communications from HMRC digitally

Get ready for MTD:

Three Steps for making your Organization ready for MTD

  • Impact Assessment
  • Deciding your approach
  • Implementation

Role of Cloud accounting in MTD:

As MTD is a digital revolution by HMRC, where the tax records are digitized, it comes as a challenge to keep the accounting records digital and can be accessed anywhere and everywhere. So here comes the space for “Cloud Accounting”.

Why Cloud Accounting?

  • Anywhere and everywhere access
  • Cost Cutting measure for business
  • Multiple User access
  • Risk-free Recovery
  • Easy and Fast Integration
  • Higher efficiency

MTD for VAT:

Digital Link – Source Data:

It is widely recognized that a VAT Group return is generally consolidated from several sources of data, MTD is not regulating the internal processes of how this is achieved. The flow of data being processed when arriving at the consolidated return. However should be digital, not withstanding any adjustments.

Software to be used:

HMRC does not approve any software. However it is working with various vendors like DataTracks, Xero, Quickbooks to test various software solutions to send the VAT through their Application Program Interface (API).

Spread Sheets and their place:

Spreadsheets can be used to record data, however, if you have several spreadsheets these must be digitally linked together. There must be no manual transfer or rekey of information from one to another.

They can also be used to create calculations that might be seen in a normal VAT return. These calculations must be kept and referenced to create an audit trail.

Spread Sheets will not be able to file directly into HMRC, so alternative or additional software must be used. All these aspects make it critical that all business entities will be required to move into a software for processing their transactions and filing the returns in a smooth way.

Some of the challenges while recording the transactions in a software:

  • Ability to understand all the features of the software to ensure quick and easy recording
  • An understanding of the controls available in the software to reduce errors in posting, duplication of records or missing out to record any particular transaction
  • A clear knowledge to ensure that all transactions relating to a particular VAT or a Tax period are properly captured in the return for that period
  • An understanding of the methods to correct such instances where the transactions are either not captured during that period or captured in one period earlier though the transactions relate to a subsequent period
  • A good understanding of the automation capabilities such that the transactions are captured in a speedy and less time-consuming manner as well as using special features like updates through bank feeds
  • Digitally interlinking the various records between organizations for invoices, payment advises, etc., to ensure that minimal manual intervention takes place to forward the invoices and payments

A good understanding of all these features would enable a Company to maintain their books of accounts in a top-notch condition besides ensuring they get a good overview of their operational performance with timely Management Information System and Dashboards on performance.

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