Unless you live under a rock, you’ve probably heard about the upcoming Brexit-based changes to the Making Tax Digital initiatives. However, you might be surprised at the devilish details that lurk behind the scenes that can harm your business if you’re not careful. Thankfully, we here at Greenback are here to help bring you the tools and resources you need to demystify this transition and come out on top.
For those who don't know, Making Tax Digital is a key part of the UK government’s plans to make it easier for individuals and businesses to get their taxes submitted accurately and keep on top of their affairs. Their stated primary goals are to ensure that this initiative helps taxpayers be more effective, more efficient, and make the entirety of the process easier for taxpayers to get their tax correct the first time.
In this Post-Brexit world, every merchant that sells even a single item into the UK will be required to register for a VAT number with Her Majesty’s Revenue and Customs (HMRC), and collect/remit VAT accordingly. In keeping with the traditional MTD rules, they are also required to keep digital records and use software to submit their VAT returns. Prior to Brexit, those below the £85,00 VAT threshold had the option of voluntarily join the Making Tax Digital service at any time until it became mandatory in April 2022. However, post-Brexit the rules have changed, and now the Making Tax Digital rules immediately apply to any merchant who selles even a single item in the UK.
Delving into the aforementioned devilish details, it’s important that we do things in order. First, it’s imperative that you familiarise yourself with how HMRC office is going to roll this out. The linked report details the intended roll-out of Making Tax Digital while the government decides on the next phases of the initiative.
HMRC states that it ‘...will continue to discuss and monitor progress with representative bodies and taxpayers, to ensure that future plans for Making Tax Digital reflect this learning.’
The British government announced the abolition of Low-Value Consignment Relief, which relieved import VAT on goods valued at £15 or less. This means there is no longer a VAT de minimis on orders being shipped to the UK, and VAT will be collected on every sale.
All businesses selling goods to the UK will be required to register for a VAT number with HMRC.
With the new UK VAT scheme, all businesses must collect 20% VAT at the time of sale on all orders with a product total of £135 or lower. However, for orders over £135, the usual rule remains the same - VAT will continue to be paid at the time of import with duty. Merchants are responsible for remitting VAT quarterly to HRMC under a registered VAT number.
A key part of complying with the new Making Tax Digital plan is to ensure timely compliance with your MTD submissions. The following report focuses on Income Tax Self Assessment obligations and how these models would be built into Making Tax Digital. Obviously, there are incentives built toward getting your submissions turned in on time and accurately, but in case of an oversight, there is a well-defined penalty model that you can reference to determine your liability.
According to the rules, any entity, even those selling low-value orders (classified as £135 or less) into the UK, including online marketplaces and B2B sales, will be responsible for collecting, accounting, and remitting the VAT.
This can be a hard pill to swallow. It’s one thing for multi-billion pound multinational conglomerates to devote an army of tax consultants with the goal of compliance with these new and sometimes confusing regulations. But did they consider the small business? The good news is, yes - HMRC certainly did the research and best of all they published their results.
B2B sellers can get an exemption but only if their customer is VAT registered themselves and they provide their VAT registration number to the seller. Also, keep in mind that the changes will not apply to gifts or consignments between private individuals as those transactions will be covered by the existing rules.
Because Making Tax Digital will affect private individuals and their chosen agents differently, there are separate resources oriented towards each relevant path.
If you’re an agent signing up clients, follow the step by step guide for agents here: > VAT guide for agents
Conversely, if you’re signing up your own business, follow the step by step guide for businesses here: > VAT guide for businesses
Self-employed businesses and/or landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after April 6, 2023.
Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital service for Income Tax. If you are a self-employed business or landlord you can voluntarily use software to keep business records digitally and send Income Tax updates to HMRC instead of filing a Self Assessment tax return.
HMRC has published a guide called ‘The consultation on the future design of Making Tax Digital for Corporation Tax’. HMRC is making it clear that it welcomes views from companies, organizations, agents, professional bodies, and software developers with the goal of always improving.
The government will provide businesses with an opportunity to take part in a pilot for Making Tax Digital for Corporation Tax and will not mandate its usage before 2026. Please click on the following link for more information.
The majority of customers want to get their tax correct the first time around, but the latest tax gap figures show that too many find this difficult, What’s worse, the majority of the mistakes are avoidable. That is relatively small comfort to those who made those mistakes, costing the Exchequer £8.5 billion in 2018 to 2019. The assumption here is that with the improved accuracy that digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records will reduce the amount of tax lost to these avoidable errors such as avoiding simple and totally avoidable transposition errors.
In the formulation of Making Tax Digital, HMRC consulted with stakeholders throughout the process, both formally and informally. Through the feedback gathered in those consultations, the initiative began to take shape.
The primary legislation for Making Tax Digital relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017. First and foremost, they stated they were interested in providing certainty around the broad framework in which Making Tax Digital will operate, with secondary legislation for VAT laid in February 2018, which came into force in April 2019.
To help demystify things, A VAT Notice has been published which explains the rules for Making Tax Digital for VAT and about the digital information that must be kept. > View the notice here
If all else fails, you can reference the communication pack linked below that supports HMRC’s partnership in establishing working arrangements with stakeholders. It is their hope that the stakeholders can use the contents of the communication pack to inform their own behaviors and key messages for their clients, customers, and members. > View communication pack here
As stated above, if you are a Seller and you sell into the UK, you will be expected to follow the Making Tax Digital rules by keeping digital records and using software to submit any VAT returns.
Greenback auto-fetches your sales, refunds, and payouts from each platform and syncs them to your preferred accounting apps, i.e. Xero, QuickBooks, etc. We even create ancillary transactions for all of your selling-related expenses such as payment processing fees, subscription fees, etc. We are fanatical about these itemized details because it’s imperative to know your cost of sales, especially as it relates to accounting for VAT.
Greenback not only allows you to export itemized transaction data to your accounting file, but we'll also retain a copy of the transaction data ensuring your ongoing compliance with Making Tax Digital regulations.
The most important thing to remember is that each provider holds funds on your behalf. You already know that when you make a sale or accept a payment, they will take the payment from the customer, then deposit the funds to a holding account. This is your balance of funds comprised of different types of transactions (e.g., payments, refunds, etc.). The provider will then transfer these funds (payouts) from your available account balance into your actual bank account based on your payout schedule.
You also know that each provider withdraws funds from your balance (ie: your shop funds/balance) to pay for various expenses such as payment processing fees and refunds. Thus, the transfers each provider will periodically make to your actual bank account will not reflect all the credits and/or debits behind the scenes. That's where Greenback provides outstanding support. Our platform will sync and generate all the transactions that affect your balance.