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Making Tax Digital - How will it Work?


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The Making Tax Digital (MTD) scheme was announced in the 2015 budget and consists of a number of measures intended to simplify the way businesses and individuals report their taxes. From April 2019 MTD will require businesses over the VAT threshold to keep digital accounting records and from April 2020 some businesses will need to file quarterly updates, replacing the traditional annual tax returns.

If you’re already using QuickFile to manage your accounts, you’re in good hands. We are active in MTD development and are listed as one of HMRC’s Contributing Software Suppliers.

Software suppliers supporting Making Tax Digital for VAT

MTD key points

We are often asked how MTD will work in a practical sense. So here’s how it currently stands.

  • From April 2019 all businesses with a turnover exceeding the current VAT threshold must maintain digital accounting records and file their VAT returns using MTD compliant software such as QuickFile.

  • From April 2020 businesses will be required to file an electronic quarterly update summarising income and expenditure. This is likely to breakdown to 15-20 lines, mostly covering types of expenditure.

  • From April 2020 businesses will need to file an annual end of year closing statement detailing any adjustments to the previously filed summary information.

  • From April 2020 those businesses on the MTD scheme will not need to file an end of year tax return. Details of any additional sources of income will need to be entered onto their Personal Tax Account (PTA).

  • From April 2020 unincorporated businesses and landlords with a turnover exceeding £85,000 (VAT Threshold) will likely be the first to start filing periodic update reports under the MTD scheme.

  • Limited companies are expected to join MTD in April 2021 or later.

April 2019 Deadline

If you are already using QuickFile and are filing your VAT Returns through the software, you will have very little to worry about come April 2019. The VAT return will work in much the same way, however you will need to link your HMRC Tax Account to QuickFile to continue filing returns, this will take a few minutes.

Since May 2018 we have been an active contributor to the MTD VAT Pilot scheme and have already successfully filed a number of VAT returns on the MTD system. If you’re interested in joining our VAT Pilot Scheme click here.

What information will I need to file on my quarterly update (2020 onwards)?

The first participants on the MTD scheme will be divided into three categories and cover non-incorporated businesses with a turnover exceeding £85,000. These are:

  • Non-property businesses
  • Property businesses (e.g. Landlords and furnished holiday lets)
  • Partnerships

A periodic update must cover a period of no more than 3 months, but can be made more frequently to cover shorter periods if preferred.

Here is what HMRC will expect each of these business types to file on their quarterly updates:

Non-property businesses

Income:

  • turnover, takings, fees, sales or money earned
  • any other business income

Expenses:

  • cost of goods bought for resale or goods used
  • construction industry – payments to subcontractors
  • wages, salaries and other staff costs
  • car, van and travel expenses
  • rent, rates, power and insurance costs
  • repairs and renewals of property and equipment
  • phone, fax, stationary and other office costs
  • advertising and business entertaining costs
  • interest on bank and other charges
  • bank, credit card and other financial charges
  • irrecoverable debts written off
  • accountancy, legal and other professional fees
  • depreciation and loss/profit on sale of assets
  • other business expenses
  • goods and services for your own use
  • income, receipts and other profits included in business income or expenses but not taxable as business profits
  • disallowable element for each category
Property businesses (furnished holiday lettings)

Income:

  • rental income and any income for services provided to tenants

Expenses:

  • tax taken off income
  • rent paid, repairs, insurance and cost of services provided
  • loan interest and other financial costs
  • legal, management and other professional fees
  • other allowable property expenses
  • private use adjustment
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • property repairs and maintenance
  • costs of services provided, including wages
Property businesses (landlord)

Income :

  • rental income and other income from property

Expenses:

  • tax taken off any income from total rents
  • premiums for the grant of a lease
  • reverse premiums and inducements
  • rent, rates, insurance, ground rents etc.
  • property repairs and maintenance
  • loan interest for residential properties and other related financial costs
  • other loan interest and financial costs
  • legal, management and other professional fees
  • costs of services provided, including wages
  • other allowable property expenses
  • private use adjustment
Partnerships

Interest and alternative finance receipts without UK tax deducted:

  • interest and alternative finance receipts from UK banks and building societies paid without tax deducted
  • interest distributions from UK authorised unit trusts and UK open-ended investment companies and investment trusts
  • income from National Savings and Investments
  • other untaxed income from UK savings and investments (except dividends)

Interest and alternative finance receipts with UK tax deducted:

  • other taxed income from UK savings and investments (except dividends) (amount net of tax deducted)
  • tax deducted

Dividends:

  • dividends and other qualifying distributions from UK companies
  • tax credits attached to such dividends etc
  • dividend distributions from UK authorised unit trusts and open-ended investment companies
  • tax credits attached to such distributions
  • stock dividends from UK companies
  • tax credits attached to such stock dividends
  • non-qualifying distributions and loans written off
  • tax credits attached to such distributions etc

Other income received without UK tax deducted:

  • other income – profit
  • other income – loss

Other income received with UK tax deducted:

  • other income (amount net of tax deducted)
  • tax deducted

What information will I need to file on my end of period statement?

The end of period statement will enable a business to make adjustments to previously submitted updates. The statement must be filed within 10 months of the accounting period to which it relates or the 31st January following the tax year in which the relevant period ends

The filing requirements will differ for partnerships and regular businesses.

Non-partnerships

Tax adjustments and elections:

  • adjustment required where the basis period is not the same as the accounting period under section 203 of the Income Tax (Trading and Other Income) Act (ITTOIA) 2005
  • averaging adjustment applied to taxable profits where an election has been made for averaging under section 222 or 222A of ITTOIA 2005
  • adjustment required as a result of a change in basis under Chapter 17 of Part 2 of ITTOIA 2005
  • total of any construction industry scheme deductions taken from payments made to subcontractors under section 61 of Finance Act 2004
  • any other tax deducted from trading income (excluding deductions made by contractors on account of tax)
  • sums due to be charged under sections 277 to 285 of ITTOIA 2005
  • adjustments required under Chapter 7 of Part 3 of ITTOIA 2005
  • claims for loss relief under Chapter 2 of Part 4 of the Income Tax Act 2007 (Chapter 4 for property businesses)
  • disallowable expenditure
  • foreign tax deducted
  • any other tax adjustment
  • adjustment on change of basis
  • foreign tax deducted

Capital allowances – claims and balancing charges:

  • annual investment allowance
  • capital allowances at 18%
  • capital allowances at 8%
  • restricted capital allowances on cars costing more than £12,000 where bought before 6 April 2009
  • business premises renovation allowance
  • enhanced capital allowances: energy-saving relief
  • enhanced capital allowances: environmentally-beneficial relief
  • enhanced capital allowanced: electric charge-points
  • enhanced capital allowances: gas refuelling equipment
  • allowances on sale or cessation of businesses use (where an asset has been disposed of for less than its tax written down value)
  • total capital allowances
  • balancing charge on sale or cessation of business use (where business renovation allowance has been claimed)
  • balancing charge on sales of other assets or on the cessation of business use (where an asset has been disposed of for less than its tax written down value)
Partnerships

Disposal of capital assets – partnerships:

  • description of assets
  • whether listed or unlisted shares or securities (if applicable)
  • name of partners who benefited from the disposal proceeds
  • total proceeds from disposal

How are QuickFile preparing for MTD?

QuickFile are committed to providing an integrated Making Tax Digital (MTD) filing solution for VAT, periodic updates and end of year statements. At this time we are coordinating with HMRC on the technical details and are fully ready for the MTD start date of April 2019.

If you’d like to join our MTD VAT Pilot you can find our more here.

We are simultaneously developing our systems to work with the April 2020 updates covering business (non-incorporate) income / expenditure reporting.

We have already developed an experimental Periodic Report, you can find out more about this here. The MTD filing capabilities in QuickFile will be provided at no additional cost to all users on a paid plan, this includes all managed Affinity accounts. Small to Medium sized accounts on our free plan will need to obtain a Power User Subscription (£45 + vat) per year to access the new MTD filing options.

We are conscious of the fact that MTD remains a constantly evolving landscape, we will endeavour to keep you up to date with developments as and when they happen.


MTD Periodic Update Report
Is quickfile MTD compilent?
To QF or not to QF?
Making Tax Digital VAT Pilot Scheme
Digital HMRC