VAT, also called Value-Added Tax, is a form of consumption tax that’s placed on products at every point in the supply chain where value is added to them. The total amount of VAT paid is the cost of the product minus the costs of raw materials that have already been taxed. The VAT is charged to sellers, and they, in turn, charge the buyers.
What is Digital VAT?
Recently, the government, through its Making Tax Digital (MTD) initiative, transferred the system of paying VAT, online. This took effect on 1st April 2019, and it means that companies can now file and pay their taxes digitally. According to the government, it was time to move the tax payment system into a 21st-century relevant model, and provide a modern and streamlined system for individuals and businesses to process their taxes. The government believes that MTD will reduce the errors involved in the tax process, and generate as much as £610 million in extra revenue over the next two to three years.
How does digital VAT affect your business?
Slightly different conditions apply for businesses that are above and below the VAT threshold of £85,000. For businesses whose VAT is below the threshold, you have the option to use or refuse the MTD system of recording your tax, at least until 2020. This means that you can choose to continue processing and paying your tax offline. You also won’t be required to keep digital records of your tax information until at least that time.
However, if your business has a VAT income above the threshold, you’re mandated to use the MTD platform. You’ll need to submit your VAT information to Her Majesty’s Revenue and Customs (HMRC) agency through MTD compliant software. You’ll also be required to keep digital records of your taxes, including your quarterly submissions.
What about VAT software?
According to HMRC, it will not be providing business owners with software for filing and keeping their digital tax records. However, there are several software applications that are suitable for the purpose. Businesses just have to ensure that these are compatible and compliant with MTD. Before selecting your software, you need to find out whether or not the digital VAT software can store your tax information, as well as whether or not the software can share and receive tax data with HMRC.
How much is new this new system going to cost you?
Many business owners fear that implementing a system like this is bound to cost them a great deal of money. For starters, small businesses will have to obtain the hardware necessary for the input and processing of their digital tax information; hardware like computers and smartphones, as well as servers where they can install and access their tax accounts. There may also be extra costs involved with training or hiring new staff to use the new system of taxation.
These costs may only affect small businesses, as larger ones already have much of this hardware in their operations. However, one cost that will cut across all businesses is the cost involved in purchasing MTD compatible accounting software. As you know, HMRC will not be providing any software for the new digital tax system, and businesses will need to pay to use software developed commercially specifically for this purpose.
Additionally, there are speculations that the cost of reporting taxes every year will also increase. Before the MTD initiative, businesses were required to report their taxes yearly. Now, the reports are to be filled every quarter. Estimated costs are between £280 and £3,000 yearly. There seem to be some disagreement on how much this new system might cost, but it’s bound to cost something to almost all businesses. It’s advisable for businesses to conduct their own investigations into the financial implications of complying with the MTD guidelines.
How much information will you have to provide under the new MTD initiative?
This is one aspect of filing taxes that will not change under MTD. Besides the information that businesses normally provide, no extra information is necessary or required. But, according to HMRC, it will request some more supplementary data sometime in the future. However, providing this data will not be mandatory, and businesses can decline to provide it.
Is your business exempted from the new MTD system?
As mentioned earlier, this all depends on which side of the threshold your business falls on. Only businesses below the VAT threshold of £85,000 are exempt from MTD currently. However, they are not exempt forever, as things are likely to change in 2020. But, for now, if your business falls below this threshold, you don’t have to input your tax records onto the system.
Besides being below the threshold, some other conditions where businesses might be exempted from MTD are as follows:
- The business owner’s religious beliefs conflict with the MTD requirements. This would typically happen in situations where the person’s religious inclinations prevent them from using computers
- The business owner is unable to use the required digital tools to keep their records. Examples of these situations would include disability, age or location (such as being in an area without internet access).
- The business has been placed into a formal insolvency procedure.
What if your business is under group VAT?
In some cases, two or more companies register as a VAT group, and they are taxed as a single entity. In these scenarios, HMRC also considers such a group as a single entity. As a result, they can use one member’s MTD compatible software to keep digital records of their tax information.
What your business stands to gain from this new system
The biggest benefit of this new system is that it eliminates many of the mistakes and human errors associated with filing taxes. Additionally, there are bound to be fewer administrative requirements, as the software will do most of the work. Additionally, it encourages businesses to digitise their records. The world is becoming increasingly digital, and paper records are becoming outdated. MTD pushes businesses to make the necessary transition to a more efficient mode of operation.
Are there penalties involved with MTD?
Just like there are penalties involved with the late filing of personal taxes, non-compliance with MTD also carries penalties. They are points based, and businesses get a point for every payment they have missed. The points add up to a particular threshold. Businesses are penalised when their points exceed the threshold. However, this penalty system will not take effect until 2020, giving businesses plenty of time to adjust to the new structure.