December 14th, 2018 / Insight posted in Articles

Making Tax Digital for membership bodies

The government’s Making Tax Digital (MTD) programme being introduced next year, is arguably the most radical change in taxation since self-assessment was enforced in 1997. From 1 April 2019, it will be mandatory for qualifying organisations to keep VAT records in a digital format and file VAT return information with HMRC using a digital link in functionally compatible software. A later date of 1 October 2019 has been agreed for organisations such as trusts, VAT groups and unincorporated charities. HMRC has said that MTD will greatly reduce the chance of human error in preparing and submitting tax returns.

With the deadline fast approaching, there is still widespread uncertainty about what needs to be done to be ready for MTD. Many organisations are unclear about the impact of these changes on their tax affairs. And many accounting software providers are yet to confirm if their accounting packages meet the new requirements, and if so, whether they will be ready ahead of the deadline.

We summarise briefly in this article what MTD involves and the changes it will require.

Organisations affected by MTD

MTD applies to all VAT-registered organisations making taxable supplies exceeding £85,000 a year. Very few business owners will be allowed to be excluded from MTD, although consideration will be given to those with disabilities and no internet access etc. MTD will even apply to overseas organisations if they are registered for VAT in the UK.

The challenge for membership bodies and other organisations with complex VAT affairs is making VAT calculations with minimal manual intervention. Many membership bodies are partially exempt and/or may be taking advantage of the Extra-Statutory Concession (ESC).

Bridging the gap

The ESC allows the membership subscription income to be apportioned to reflect the actual benefits provided to members. These calculations usually require that VAT return figures are entered onto a spreadsheet and checked manually. It should be possible to continue preparing the calculations on this basis, but the spreadsheets will need to be linked to the digital accounting software. Appropriate ‘bridging software’ will be able to submit the VAT information to HMRC in the new digital format.

After MTD is introduced for VAT, it will apply to income tax from April 2020 and then corporation tax. So, it is vital that organisations like yours are planning for MTD today! Now is the time to be implementing changes that best accommodate the requirements for VAT and other taxes, and fit best with your organisation’s overall needs. Crucially, you need to allow enough time to train your staff and test the new systems thoroughly before the MTD requirements become mandatory.

MTD in practice

The introduction of MTD offers opportunities as well as compliance obligations. See it as a chance to review your current VAT accounting processes/systems. Check that the processes in place are still fit for purpose and whether you could be more efficient. You might even find that you could be paying less VAT!

On a practical level, you should be looking to do the following now:

  • Contact your accounting software provider and establish that they will have compatible software ahead of the introduction date of April 2019.
  • Evaluate how you are currently carrying out your VAT accounting and how much manual intervention takes place.
  • Assess whether your current VAT accounting is compliant.
  • Identify the staff in your organisation who are involved in VAT accounting and preparing the returns, and engage with them now to increase understanding and awareness.
  • Draw up a timeline and prepare for the migration process.

Benefits of MTD for your organisation

Although the new system means major changes, it should ultimately create benefits by:

  • Improving the quality of record keeping
  • Reducing errors caused by manual data entry
  • Providing more up-to-date information on how much tax you owe, thereby helping with budgeting and cash flow.

How Kingston Smith can help your organisation

Kingston Smith has one of the most experienced VAT teams in the business and includes specialists who have worked within HMRC.

We are evaluating the full impact of the changes and the necessary steps for organisations to ensure a successful migration to MTD for VAT.

Our close relationship with leading software providers means we can review your systems, streamline your accounting function and help you transfer to the digital solution that is right for your business needs while also meeting HMRC’s requirements.

By the same token, we are laying the foundations for applying MTD to the other taxes. So don’t hesitate to contact our VAT MTD experts with any queries you might have.

Keep up to date with the latest developments on our MTD hub.