Limited company Making Tax Digital duties start today. Are you ready?

Today, April Fool’s Day -- Friday April 1st 2022, sees HMRC make Making Tax Digital compulsory for VAT-registered businesses irrespective of their turnover. Previously a turnover of £85,000 was necessary to qualify.

Making Tax Digital: A contractor's refresher

To recap, MTD will ensure all limited company contractors make digital submissions for their tax records, and returns will automatically be sent to HMRC, writes Christian Hickmott, managing director of contractor accountancy firm Integro Accounting .

The thinking is that this will allow a more accurate reflection of the tax owed. But quite understandably, change can be a little unnerving, so let’s try to alleviate any concerns and answer contractors’ most frequently answered questions.

As a limited company director, is MTD taken care of by my accountant -- no matter what?

Any reputable accountant – whether a large or small accountancy firm (or even a high street accountant), should take away your MTD-registration worry and register your business for MTD, on your behalf. Or at least, they should have a clear MTD-complaint plan in place. But the nature of that plan will be totally up to / dependent upon the accountant/accountancy firm and how they manage your accounts.

If your accountant is using an HMRC-approved bookkeeping software, such as FreeAgent, this can all automatically be managed and taken care of on your behalf.

HMRC-approved software makes it simple to be MTD-compliant. Quite simply, your accountant will just need to inform HMRC that their client (you!) wishes to go on MTD. Your accountant will need to use a simple webform which requires your name, company name and VAT number. HMRC will notify both the individual and the accountant that this has been successful, usually within two to three days following completion.

Once completed, your accountant (‘agent’ in HMRC-speak) should then notify, in this example, Free Agent that you are MTD-compliant. And then all features will be applied automatically.

As you can hopefully see, the process of MTD application and MTD registration is straight forward. Our firm manages the process on behalf of our limited company contractor clients, aware that from today, MTD from HMRC is a legal obligation.

What should I ask my accountant if I’m unsure? Is it my responsibility to make sure my firm is MTD-ready by today?

As the owner of your own company, never assume anything is taken care of! With HMRC and tax matters, the responsibility lies with the taxpayer/company director, and you should always speak to your accountant and challenge them if you feel you are not being given clear direction.

So, if you’re unsure about your limited company’s MTD status, we would recommend asking your accountant:

• Are you automatically registering my business for MTD?
• Do you require my approval to register the company for MTD?
• Is MTD application/registration something I am required to do myself?
• Do you (my accountant) have bridging software? Details on this below.

Be aware, HMRC introduced MTD three years ago as a ‘soft trial’ for those companies VAT-registered and with an annual turnover of over £85,000. So most accountancy firms should be very much aware of MTD and have a plan in place to transfer all their clients to digital accounts.

Will I incur an HMRC penalty if I’m not MTD-ready by today?

All VAT submissions from April 1st will need to be submitted via the MTD route.

HMRC has stated that failure to sign up to MTD may result in a penalty, but it is unclear as to how much the penalty would be or when it would be issued.

What we do know is that you can sign-up to MTD at least 5 days after your last VAT period, but sign-up should be no less than 7 days before making your first MTD VAT return.

Should you be unclear, speak to your accountant. Remember though sadly, any timing issues HMRC raises, such as an extensive delay in signing up, will lie with the director/taxpayer (although your accountant can of course advise you, in terms of your response to HMRC).

What's the very least a limited company can do to comply with MTD?

We have received a large number of enquiries over the past few weeks from contractors that are unclear why they cannot just stick with a spreadsheet and upload it!

With MTD, if you continue using a spreadsheet, you will still be required to look at ‘bridging software.’ Without this software, VAT returns cannot be submitted.

So, API-enabled bridging software will allow information to be shared with HMRC while adhering to their requirements for Making Tax Digital.

Any penalty (from HMRC for non-compliance) should only be applied at your next VAT submission. Again, if using an accountant, speak to them and ask if there is a plan within the required timeframe before you run the risk of an HMRC penalty!

If my accountant lets me to continue operate without MTD, and I don’t ask about MTD; who pays the likely incoming HMRC penalty?

If you sit within the required criteria for MTD registration, and have not registered for MTD, or your accountant has not registered you for MTD, then you will simply be unable to file your tax return!

Our understanding is that the previous way of filing tax returns will be void and the new system will replace it as such. Any penalty against the business will need to be paid by the taxpayer.

Are there any exemptions from MTD?

There are some grounds that can make you exempt from MTD.

These exemptions include age, disability, location (should you be a farmer with limited resources!), and religious grounds.

Contractors interested in being exempt from MTD will also have to specify their trade/sector to HMRC so, most importantly, please seek professional advice, especially as HMRC will look at applications for MTD exemptions on a case-by-case basis.  

What if contractors can’t stomach the change to digital, or stump up the software investment?

Like most contractor accountants, we appreciate change can always feel uncomfortable! But we’d say try to embrace the change as digital in our experience is a good thing with tax. Also, we’ve found it usually makes contractors’ tax admin workload much lighter.

Nonetheless, your accountant and arguably HMRC too should appreciate not everyone has the luxury to start paying out for new bookkeeping software!

However there are several companies that offer competitive pricing that help alleviate the financial worry. Likewise, using existing systems and a ‘bridging software’ can be a cheap and cheerful solution which, crucially, still complies with MTD.

Try to keep in mind, MTD’s sole purpose is to provide more accurate information and increase accuracy. So MTD offers the prospect of less risk and exposure to penalties.

Plus, MTD-approved software reduces the chance of errors and paying the wrong amounts. We have had several clients who historically always used a bookkeeping-spreadsheet-system, and had formulas that were incorrect, pulling wrong or incorrect data or using incorrect threshold amounts! Furthermore, unexpected updates made by HMRC can leave spreadsheets and bespoke programmes vulnerable, as changes at the Revenue’s end will not automatically be incorporated. These typically need editing or including manually, so there is room for error with the more traditional bookkeeping methods, shoeboxes included!

In addition consider the context. More and more tax and financial institutions are moving into digital record-keeping (the tide is definitely not turning back!). So consider the longevity of your investments and the benefits your advisers see.

Doing your own accounts, or just want to know what a contractor accountant thinks?

As to those contractors doing their own accounts and not liking the look of MTD, consider reviewing your business model. Question yourself; do you actually NEED to be VAT-registered? Assess whether the change to MTD is worth it based on whether you need to be VAT-registered at all. You can always de-register for VAT which means MTD for VAT will not apply to your circumstances.

Finally, from our perspective as a contractor accountant MTD is very straightforward – refreshingly straightforward as an HMRC initiative, actually!

Keep in mind, MTD doesn’t necessarily change what your accountant was doing for your limited company before, but the added benefit is that both you and your adviser will now have a full audit trail of the information being inputted -- in real-time. It helps enormously with less expected figures, sudden impulsive decisions by contractors (perish the thought!) and has greater accuracy, meaning HMRC should get things right more often too. As it’s online rather than in ink, very many things with MTD are quickly, easily amendable too, instantly for all parties. Time will tell with this new, now-required system of digital tax accounts, but from our perspective so far, we’re a convert.