Digital record keeping - HMRC’s perspective

The Making Tax Digital (MTD) agenda is driven by HMRC on the basis that it believes that businesses may be making errors or misreporting when submitting their tax returns. Subsequently the tax take is less than it is expecting.

As much of our commercial life now is supported or run with the help of technology, HMRC is increasingly expecting businesses to record and report to it digitally too.

By asking businesses to record their financial transactions using software it hopes to improve the overall quality of reporting that businesses have to hand, and of course make sure it is collecting the right amount of tax due.

The digital record as the building blocks of compliance

Where manual record keeping and even paper ledgers may be perfectly adequate when appropriately done, recording transactions and keeping them in software (including spreadsheets) will become mandatory for all self employed and landlord taxpayers with income over £10,000 from April 2024.

Each of these individual income and expenditure entries should be viewed as a ‘digital record’, which in turn form a larger digital record for that entity. Data should be stored digitally, manipulated digitally, and will need to be submitted digitally to HMRC - an unbroken digital chain, with no manual input.

This digital approach therefore forms the fundamental building block of compliance, and needs to be complete, accurate and available in a timely way.

What is acceptable as a digital record

While the details are still being finalised as to what data will need to be stored and reported on, the individual line items are likely to be those that we are already accustomed to: Dates, company names, amounts, VAT, all recorded and coded correctly.

HMRC has confirmed that spreadsheets will be allowed,  however the data will still need to be filed in a compliant way, which may mean using third party bridging software similar to that available for MTD for VAT submissions.

Clients using commercially available accounting software, should check with their supplier to ensure that they will be MTD ITSA compliant and in what timescales. AutoEntry already collects the core data that will be needed to be compliant, and will work with the most common ledger software to help finalise and file the quarterly updates.

How digital records will be used

The primary function of keeping digital records is to enable quarterly updates, year end adjustments and final confirmation. HMRC are likely to analyse the data to check for general quality, but will maintain the right to investigate any data submitted and issue fines including for behavioral factors such as persistent late filing, or sending in wilfully inaccurate data.

It’s not known if the data will be used for any other purpose by HMRC, and currently they are saying that there is no intention to collect tax quarterly (although clearly this is a possibility in the future). From an accountant's perspective, there is obviously an opportunity to have greater visibility over client data and to provide useful updates and information on tax liability, cash, general performance and even how close they may be to the VAT threshold. Things which might not always be clear until year end if they are not keeping up to date and clear financial records generally.

Acknowledging the client challenge

Given that the new MTD ITSA regulations will cover over 3.5million entities there is going to be a huge spectrum of types of businesses involved, and just as much variation in the way they currently think and look after their financial admin.

Some may have developed intricate systems across numerous apps on their phone, while others may sit down on a half yearly or annual basis. For each the changes will require a different approach to what they are currently used to, will require compliant software, and possibly more involvement from you, their adviser.

Although there are positives for having the data to hand, few clients will perceive it as having many direct business benefits. This is a challenge that many accountants and bookkeepers will recognise, and needs to be acknowledged and addressed as soon as possible.

Explaining digital record keeping to clients

Talking through the MTD ITSA timeline with clients needs to start as soon as is practical. Explaining the fundamentals, including what the options are for keeping digital records is an important part of this. While many will see that there is a long time to go before they need to start worrying about it, the reality is that this may cause both them and you more stress as the deadline looms.

Keeping your service and client facing technology solutions to their most simplest,will help reduce any of the fear or anxiety they may have in making the transition.

How AE helps to record, categorise and automate digital records

AutoEntry is step one for MTD ITSA compliance. It allows you to collect, collate and code the essential transaction data and create the automation that will be needed to handle the volume of data from your sole trader and landlord clients. Turning paper and documents into compliant digital records ready for you to analyse, reconcile and file.

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Visit our Making Tax Digital page for more insights and tips to get you MTD ready