As part of the HMRC’s Making Tax Digital (MTD) process, businesses in the UK with annual turnover above £85,000 will have to keep digital VAT records for accounting periods beginning on or after 1 April 2019.
There will be no change in the amount of records that businesses must keep or the frequency in which VAT returns need to be submitted.
The only difference under MTD for VAT is that records of business transactions must be recorded digitally.
However, for many farm businesses this single change is a significant one.
It requires businesses to file records of transactions on a digital platform, such as an accounting software program, which then connects to HMRC’s system for VAT claims through a “digital link”.
This allows the information needed for a nine-box VAT return to be calculated on the business’s digital accounting program automatically, and this is then submitted directly to HMRC’s system.
It effectively means that the information in a VAT return will no longer have been tallied up by a farmer manually and then typed into the nine boxes on the HMRC’s online VAT portal.
HMRC confirmed to the Irish Farmers Journal last week that businesses within the scope of MTD (ie with annual turnover above £85,000) will not be able to file VAT returns through the existing HMRC online portal once MTD becomes mandatory.
All VAT-registered businesses, regardless of turnover, can begin using MTD compatible software ahead of April through a voluntary pilot scheme.
Other taxes
Although HMRC has postponed the introduction of MTD for other taxes, such as income and corporation taxes, further rollout of MTD is expected in the coming years.
The official line from HMRC is that “no taxes other than VAT will be mandated before 2020 at the earliest”.
Although the process has been widely criticised and will prove daunting for many businesses, there are some benefits to MTD
However, the direction of travel within HMRC is to have businesses filing digital records of transactions quarterly for income and corporation tax calculations.
Although the process has been widely criticised and will prove daunting for many businesses, there are some benefits to MTD.
Businesses will have more up-to-date information on their tax situation, and errors will be flagged quicker.
Exemptions
There are exemptions to the MTD process, which are based on the same criteria that allowed some businesses to opt out of submitting online VAT returns when it became compulsory seven years ago.
HMRC states that businesses which are already exempt from filing VAT returns online do not need to re-apply for an exemption to MTD.
Criteria which allows a business to be exempt includes age, disability and internet access.
However, it is expected that receiving approval for an exemption to MTD will prove difficult, especially if exclusion was not granted back in 2012.
Soft landing
As well as having a digital link to connect a business’s digital VAT records (an accounting software program or a spreadsheet) to HMRC’s system, a digital link is also needed if a business has VAT records on more than one software program or spreadsheet.
A digital link between the main VAT record and HMRC is still needed from April 2019
However, HMRC is allowing a “soft landing” approach in the first year of MTD up to April 2020, where information can be copied and pasted (or manually re-typed), meaning a digital link is not needed to connect different programs or spreadsheets together.
HMRC states that the soft-landing is only for businesses that have records of transactions filed across more than one software program or spreadsheet.
A digital link between the main VAT record and HMRC is still needed from April 2019.
This means that the soft landing is unlikely to benefit many farm businesses as most farmers will likely keep all digital records of business transactions in one software program or spreadsheet.
MTD delayed for low turnover businesses
The rollout of MTD for VAT to businesses with an annual turnover below £85,000 is likely to be delayed beyond April 2020.
The original plan from HMRC was to extend MTD to VAT-registered businesses with lower turnovers 12 months after the process becomes mandatory for other businesses in April 2019.
However, the original start date for lower turnover businesses of April 2020 has recently been removed from all MTD guidance on the HMRC website.
“MTD will not be extended to other taxes or to those below the VAT threshold (annual turnover of £85,000) until the system is shown to be working,” a HMRC spokesperson told the Irish Farmers Journal.
HMRC guidance states that a business which is eligible for MTD cannot revert to the old system if its turnover drops below £85,000 at some point in the future.
“You are still required to continue to keep digital records and send HMRC your VAT returns using MTD-compatible software,” the guidance reads.
Small businesses
There is no free MTD software programme being provided by HMRC for VAT, with private firms developing and supplying software instead.
Although there is a significant cost for most businesses to be compliant with MTD, HMRC has indicated that some small, non VAT-registered businesses will not incur a cost when MTD is eventually rolled out to other taxes.
“The government is committed to ensuring the availability of free income tax software for the smallest unincorporated businesses with the most straightforward tax affairs once they are mandated to join MTD,” HMRC guidance states.
Options for compliance under MTD rules:
Accounting software program: Before selecting accounting software, farmers should get advice from their accountant so that they subscribe to a program that their accountant is familiar with. This allows accountants to give farmers guidance if needed and means that they can use it to finalise income tax calculations when MTD is eventually extended to other taxes.
A list of MTD-compatible software packages is available on the HMRC website.
Most companies offer a 30-day free trial and have a range of programs on offer at various prices.
The most basic packages start from around £10/month.
Companies with programs include Xero, Quickbooks, KashFlow and Sage.
Accounting software programs designed specifically for farm businesses are also available and can offer benchmarking tools for farm enterprises. Such programs include Kingswood Accounts and Farmplan.
Spreadsheet and bridging software: VAT records can be filed on a standard spreadsheet, such as Microsoft Excel, and bridging software can be downloaded to provide the all-important digital link. “Bridging software must be capable of extracting or receiving the information from the spreadsheet digitally and then sending it to HMRC systems,” guidance from HMRC reads.
HMRC anticipated that more firms would develop bridging software and it would be widely available free of charge.
This has not materialised at present, although some firms have indicated that they are still in the process of developing free bridging software.
Other companies are currently offering free bridging software for one year, with prices starting from £30/year thereafter.
Firms providing bridging software at present include Tax Optimiser, Absolute Excel VAT Filer and Tax Calc.
Agent and bookkeeping service: Accountants and form fillers are offering bookkeeping services where business transactions are filed onto an accounting software program and VAT returns are submitted on a farmer’s behalf.The cost of this service varies widely and starts from £35/month (including software subscription) for the smallest farms with fewest business transactions. In general, accountants are likely to charge more than form fillers for this service.
Accountants indicate that costs can be lowered significantly if a farmer makes digital records of business transactions on a standard spreadsheet, such as Excel, and then sends this to their agent.
The digital records can then be moved into the accounting software program and VAT return submitted. This removes the need for the agent to file digital records of individual invoices.
The £85,000 VAT threshold
For small to medium-sized farm businesses in NI it is likely that many are close to the £85,000 taxable turnover VAT threshold for MTD.
When assessing the taxable turnover of a farm business, it is essentially everything you sell that is not exempt from VAT. So items that are outside the scope of VAT, such as direct farm payments, are not included in the calculation.
What is included in the calculation are zero-rated items such as livestock and crop sales. Also, sales of equipment and contract work done for other farmers.
VAT-registered businesses with taxable turnover below the VAT threshold (£85,000) can continue (for now) to use the current online VAT system to file their returns.
They can also choose to opt-in for MTD if they so wish.
Read more
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As part of the HMRC’s Making Tax Digital (MTD) process, businesses in the UK with annual turnover above £85,000 will have to keep digital VAT records for accounting periods beginning on or after 1 April 2019.
There will be no change in the amount of records that businesses must keep or the frequency in which VAT returns need to be submitted.
The only difference under MTD for VAT is that records of business transactions must be recorded digitally.
However, for many farm businesses this single change is a significant one.
It requires businesses to file records of transactions on a digital platform, such as an accounting software program, which then connects to HMRC’s system for VAT claims through a “digital link”.
This allows the information needed for a nine-box VAT return to be calculated on the business’s digital accounting program automatically, and this is then submitted directly to HMRC’s system.
It effectively means that the information in a VAT return will no longer have been tallied up by a farmer manually and then typed into the nine boxes on the HMRC’s online VAT portal.
HMRC confirmed to the Irish Farmers Journal last week that businesses within the scope of MTD (ie with annual turnover above £85,000) will not be able to file VAT returns through the existing HMRC online portal once MTD becomes mandatory.
All VAT-registered businesses, regardless of turnover, can begin using MTD compatible software ahead of April through a voluntary pilot scheme.
Other taxes
Although HMRC has postponed the introduction of MTD for other taxes, such as income and corporation taxes, further rollout of MTD is expected in the coming years.
The official line from HMRC is that “no taxes other than VAT will be mandated before 2020 at the earliest”.
Although the process has been widely criticised and will prove daunting for many businesses, there are some benefits to MTD
However, the direction of travel within HMRC is to have businesses filing digital records of transactions quarterly for income and corporation tax calculations.
Although the process has been widely criticised and will prove daunting for many businesses, there are some benefits to MTD.
Businesses will have more up-to-date information on their tax situation, and errors will be flagged quicker.
Exemptions
There are exemptions to the MTD process, which are based on the same criteria that allowed some businesses to opt out of submitting online VAT returns when it became compulsory seven years ago.
HMRC states that businesses which are already exempt from filing VAT returns online do not need to re-apply for an exemption to MTD.
Criteria which allows a business to be exempt includes age, disability and internet access.
However, it is expected that receiving approval for an exemption to MTD will prove difficult, especially if exclusion was not granted back in 2012.
Soft landing
As well as having a digital link to connect a business’s digital VAT records (an accounting software program or a spreadsheet) to HMRC’s system, a digital link is also needed if a business has VAT records on more than one software program or spreadsheet.
A digital link between the main VAT record and HMRC is still needed from April 2019
However, HMRC is allowing a “soft landing” approach in the first year of MTD up to April 2020, where information can be copied and pasted (or manually re-typed), meaning a digital link is not needed to connect different programs or spreadsheets together.
HMRC states that the soft-landing is only for businesses that have records of transactions filed across more than one software program or spreadsheet.
A digital link between the main VAT record and HMRC is still needed from April 2019.
This means that the soft landing is unlikely to benefit many farm businesses as most farmers will likely keep all digital records of business transactions in one software program or spreadsheet.
MTD delayed for low turnover businesses
The rollout of MTD for VAT to businesses with an annual turnover below £85,000 is likely to be delayed beyond April 2020.
The original plan from HMRC was to extend MTD to VAT-registered businesses with lower turnovers 12 months after the process becomes mandatory for other businesses in April 2019.
However, the original start date for lower turnover businesses of April 2020 has recently been removed from all MTD guidance on the HMRC website.
“MTD will not be extended to other taxes or to those below the VAT threshold (annual turnover of £85,000) until the system is shown to be working,” a HMRC spokesperson told the Irish Farmers Journal.
HMRC guidance states that a business which is eligible for MTD cannot revert to the old system if its turnover drops below £85,000 at some point in the future.
“You are still required to continue to keep digital records and send HMRC your VAT returns using MTD-compatible software,” the guidance reads.
Small businesses
There is no free MTD software programme being provided by HMRC for VAT, with private firms developing and supplying software instead.
Although there is a significant cost for most businesses to be compliant with MTD, HMRC has indicated that some small, non VAT-registered businesses will not incur a cost when MTD is eventually rolled out to other taxes.
“The government is committed to ensuring the availability of free income tax software for the smallest unincorporated businesses with the most straightforward tax affairs once they are mandated to join MTD,” HMRC guidance states.
Options for compliance under MTD rules:
Accounting software program: Before selecting accounting software, farmers should get advice from their accountant so that they subscribe to a program that their accountant is familiar with. This allows accountants to give farmers guidance if needed and means that they can use it to finalise income tax calculations when MTD is eventually extended to other taxes.
A list of MTD-compatible software packages is available on the HMRC website.
Most companies offer a 30-day free trial and have a range of programs on offer at various prices.
The most basic packages start from around £10/month.
Companies with programs include Xero, Quickbooks, KashFlow and Sage.
Accounting software programs designed specifically for farm businesses are also available and can offer benchmarking tools for farm enterprises. Such programs include Kingswood Accounts and Farmplan.
Spreadsheet and bridging software: VAT records can be filed on a standard spreadsheet, such as Microsoft Excel, and bridging software can be downloaded to provide the all-important digital link. “Bridging software must be capable of extracting or receiving the information from the spreadsheet digitally and then sending it to HMRC systems,” guidance from HMRC reads.
HMRC anticipated that more firms would develop bridging software and it would be widely available free of charge.
This has not materialised at present, although some firms have indicated that they are still in the process of developing free bridging software.
Other companies are currently offering free bridging software for one year, with prices starting from £30/year thereafter.
Firms providing bridging software at present include Tax Optimiser, Absolute Excel VAT Filer and Tax Calc.
Agent and bookkeeping service: Accountants and form fillers are offering bookkeeping services where business transactions are filed onto an accounting software program and VAT returns are submitted on a farmer’s behalf.The cost of this service varies widely and starts from £35/month (including software subscription) for the smallest farms with fewest business transactions. In general, accountants are likely to charge more than form fillers for this service.
Accountants indicate that costs can be lowered significantly if a farmer makes digital records of business transactions on a standard spreadsheet, such as Excel, and then sends this to their agent.
The digital records can then be moved into the accounting software program and VAT return submitted. This removes the need for the agent to file digital records of individual invoices.
The £85,000 VAT threshold
For small to medium-sized farm businesses in NI it is likely that many are close to the £85,000 taxable turnover VAT threshold for MTD.
When assessing the taxable turnover of a farm business, it is essentially everything you sell that is not exempt from VAT. So items that are outside the scope of VAT, such as direct farm payments, are not included in the calculation.
What is included in the calculation are zero-rated items such as livestock and crop sales. Also, sales of equipment and contract work done for other farmers.
VAT-registered businesses with taxable turnover below the VAT threshold (£85,000) can continue (for now) to use the current online VAT system to file their returns.
They can also choose to opt-in for MTD if they so wish.
Read more
Digital tax to cost farmers £100s
HMRC postpones digital income tax plans
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