There are two obligations under MTD (for VAT or income tax) – to keep a completely digital record of all the accounting data necessary to make the specified report to HMRC, and to make those reports using MTD-compatible software.
Essentially the accounting records must be digitised and all parts of the accounting system must be connected via digital links. However, this digitisation is not as daunting as you may think.
Spreadsheets are a digital record, and HMRC will continue to accept them as a digital record for the foreseeable future. A taxpayer who records all their business income and expenses on a spreadsheet and uses bridging software to read the relevant totals from that spreadsheet and to submit them, without rekeying, to HMRC, will meet their MTD ITSA obligations.
It is important to understand where the accounting system starts to recognise what needs to be digitised.
The business bank account is not part of the accounting system, so it is not a requirement to have a digital link between the bank statements and the accounting records. It may be helpful to have an automatic bank feed into the accounting system, but it is not necessary.
Similarly, suppliers’ invoices and receipts for expenses do not have to be read into the accounting system digitally. It may save work to use a piece of software to capture that information digitally instead of keying the details into the accounting software or spreadsheet, but it is not a requirement for MTD.
If the accounting system has several software packages doing different things, those pieces of software do need to be connected digitally to comply with MTD.
For example, a car hire firm has an automated booking system that generates the order and the invoice to the customer. It uses a separate system to record all the expenses of the business. Under MTD the booking software needs to be digitally linked to the expenses recording system, perhaps by both being digitally connected to the accounts production software which also submits the MTD reports to HMRC.
We don’t have the regulations or guidance on digital records for MTD ITSA yet, but they may be similar to the VAT requirements.
Written by the Tax Advice Network