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Making Tax Digital for law firms: what does it mean for you?

making tax digital for law firmsNow that the dust has settled on GDPR, the next major challenge to face the legal profession is HMRC’s latest brainchild. Making Tax Digital for law firms and other businesses comes into force on 1 April 2019.

Initially the scope of the project will only cover VAT submissions. However, over a period of years, this will be extended to cover other forms of taxation.

So, what is MTD all about and what will it mean for your legal business? Let’s take a look.

What is MTD?

MTD is the UK’s biggest tax shake-up in a generation. Whether you’re an accountant or business owner, it will have an impact upon you. It is a government initiative that sets out a bold vision for a digital tax system to make it easier for individuals and businesses to get tax correct and keep on top of their affairs. Initially, this will mean the end of the VAT return. Eventually, the end of the tax return for millions.

Who has to use it?

The projected timeline is as follows:

  • April 2019: The initial phase of implementation will mean that VAT registered businesses with turnover above the VAT threshold (currently £85,000 excluding VAT) will have to comply.
  • April 2020: The remaining VAT registered businesses – those voluntarily VAT registered with VAT-able turnover under £85,000.
  •  Projected for after 2020: Sole-traders, partnerships, landlords and trading companies. (The start date will be confirmed by the government after the successful roll out of Making Tax Digital for VAT.)

How will it operate?

The requirements for VAT reflect the current rules for keeping and preserving records, keeping accounts and making returns. In addition, new powers will allow HMRC to require a business to keep and preserve certain records digitally. Draft regulations granting these powers were published on 18 December 2017.

If your business has income above the VAT threshold, you will need appropriate software. This must be capable of extracting data from the accounting records and submitting it. This is the equivalent to what you currently file through the nine box submission on the Government Gateway.

The bottom line is you will need updated commercial software. Alternatively, application programming interfaces (APIs) will need to be attached to in-house accounting systems to allow returns to be filed. All users of LawWare’s practice management and accounting system will be able to file their VAT returns directly with the HMRC in time for the April 2019 deadline.

What will it mean for your business?

making tax digital for law firmsIf you don’t keep digital accounting records…

This is the main issue in MTD. If you do not currently maintain digital accounting records you will now need to do so. Many such businesses may not have computers in their businesses, although they may have access to smart devices (phones or tablets). For those that choose not to move to commercially available software packages, HMRC has indicated that free software products, with free updates, will be provided.

These businesses may choose to set up and maintain their digital accounting records themselves, using free software provided and smart devices, although many are likely to turn to accountants for advice. In addition to securing software that can run on an appropriate device, these businesses will need help setting up processes and systems to capture and store records electronically and send them to HMRC on a quarterly basis.

Can you still use spreadsheets?

HMRC confirmed that businesses will be able to continue to use spreadsheets for record keeping. However, they must ensure that their spreadsheet meets the necessary requirements of MTD for business. This means the spreadsheet must be able to pass relevant information across to HMRC every quarter. Doing this will involve combining the spreadsheet with additional software to perform the upload of data to HMRC.

What are the benefits?

If you read deeply into the HMRC guidance notes, there is mention of a transitional period following the implementation date. This is likely to be a one-year grace period though that is not made explicitly clear.

HMRC believes that the new system will prevent mistakes being made. So, underpayments and overpayments of VAT may become a thing of the past. From HMRC’s perspective, the reduction in workload for their officials and VAT inspectors seems to be clear.

There is one final point, which again, is not explicitly stated by HMRC. MTD will potentially allow HMRC to access transactional level VAT data – something they have never had before outside periodic VAT inspections.

Mike O’Donnell. August 2018.

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