MTD: The changes for VAT and Corporation Tax

Agri business owners need to be aware that HMRC’s so called ‘soft landing’ period for Making Tax Digital (MTD) came to an end recently.

When MTD first came into force in 2019, HMRC allowed businesses additional time to put in place digital links. The soft landing was due to come to an end in April 2020 but was extended to April 2021 as a result of Covid-19.

From now on, HMRC will issue penalties for not keeping complete and ‘adequate’ digital records for VAT returns – which means copy and paste data is no longer sufficient.

Meanwhile, as part of the Government’s plans to roll out MTD more widely, a consultation has been carried out by HMRC to explore how the core principles of MTD can be applied to Corporation Tax (CT).

Within the consultation document, HMRC made it clear that MTD for CT is a means of tackling the underpayment of tax, especially amongst smaller businesses, where HMRC believes these are significant issues with errors.

The tax authority has indicated that as much as £2.1billion of the tax gap relates to CT.

Along similar lines to the existing MTD for VAT system, the proposals put forward a process that would require companies to maintain their records digitally and the submission of quarterly updates and a year-end tax return using MTD compatible software.

These quarterly submissions will focus on accounting data, with the option of including indicative changes to tax treatment. However, the usual annual tax return will be retained to allow HMRC to take a final decision on tax treatment.

The changes, if implemented, will affect the majority of agricultural businesses. Under the current proposals, it will be necessary to link accounting data directly to the tax return submission for all businesses.

The consultation states, “The digital records kept within the entity’s software may also form the prime record for their accounts. To comply with the obligations of MTD, accounting and tax adjustments relating to the period will need to occur either in that software or alternatively in linked software.”

HMRC has indicated that it intends to hold a voluntary pilot from April 2024 to test the effectiveness of the system, before rolling it out more widely.

It is important that businesses prepare themselves for future changes and that VAT-registered businesses continue to comply with the current digital tax rules.

This includes using the correct online accounting software and processes that are compliant with the ever-changing MTD regime.

If you would like help preparing for MTD or are struggling with the complexities of the current VAT regime, please contact us.

Posted in ARA.