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Making Tax Digital For VAT - January 19th 2021

Making Tax Digital (MTD) for VAT

Introduction

From the 1 April 2022, MTD for VAT will apply to all VAT registered businesses regardless of the level of turnover. The first VAT period to which MTD applies to all VAT registered businesses (who are not already doing so) will be the one commencing on or after 1 April 2022.

What is "Making Tax Digital"?

Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient. All of your tax information will be in one place (your digital account) and you will be able to pay tax based on your business activity during the year. You can upload and update your tax account in real time.

Will it affect me?

If you own a business, you are self-employed and you pay income tax, national insurance, VAT or corporation tax, then it is quite likely you will be affected. This means you could be required to keep track of your tax affairs digitally using MTD compatible software, and to update HMRC at least quarterly via your digital tax account. Eventually this will abolish the annual tax return. This will be the law and there will be penalties for non-compliance. 

When is this happening?

MTD for VAT has already started and has been “live” for nearly two years.  It started with businesses above the VAT threshold limits (currently £85,000) in April 2019.

From the 1 April 2022, MTD for VAT will apply to all VAT registered businesses regardless of level of turnover.

The notice below explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you. It was last updated 31 December 2020.

Please talk to us about how we can help your business comply with the new rules. We can recommend the right software and provide the training and support you need.

VAT notice 700/22: Making Tax Digital (MTD) for VAT

This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you. It was last updated 31 December 2020.

Rules introduced under the Making Tax Digital (MTD) initiative mean VAT registered businesses with taxable turnover above the VAT registration threshold need to keep digital records and submit VAT Returns to HMRC using compatible software. From 1 April 2022 this will apply to all VAT registered businesses.

This notice explains:

  • the digital records businesses must keep, and ways to record transactions digitally in certain special circumstances
  • what counts as compatible software, and when software programs do and do not need to be digitally linked where a combination of programs is used.

MTD for VAT requires VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT Returns using software.

It is increasingly common for business records and accounts to be kept digitally, in a software program on a computer or tablet, or in a smartphone application, or maintained through such a device and stored using a cloud-based application.

The difference under MTD is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT Returns using the information maintained in those digital records and communicating with HMRC digitally through the Application Programming Interface (API) platform.

If your digital records are up to date, software will be able to collate and prepare your return for you. It will then show the return to you and ask you to declare that it is correct and confirm that you want to submit it to HMRC. Once you have submitted your return you will receive confirmation through your software that it has been received.

The notice provides further details of the Making Tax Digital rules. The overview of MTD can be seen here.

Government Resources

Below are useful references to guidance provided by the Government.

VAT record keeping

VAT registered businesses with a taxable turnover of more than £85,000 must follow the rules for ‘Making Tax Digital for VAT’ by keeping some records digitally, unless:

  • your business uses the VAT GIANT service, for example if you’re a government department or an NHS Trust
  • you apply for an exemption

You can choose to sign up to Making Tax Digital for VAT if your business earns less than £85,000.

From 1 April 2022 all VAT registered businesses must sign up, whatever they earn.

Records you must keep digitally

  • You need to keep the following records digitally:
  • your business name, address and VAT registration number
  • any VAT accounting schemes you use
  • the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
  • the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
  • any adjustments you make to a return
  • the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
  • the rate of VAT charged on goods and services you supply
  • reverse charge transactions - where you record the VAT on both the sale price and the purchase price of goods and services you buy
  • your total daily gross takings if you use a retail scheme
  • items you can reclaim VAT on if you use the Flat Rate Scheme
  • your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme

You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:

  • volunteers for charity fundraising
  • a third-party business
  • employees for expenses in petty cash

You must add all your transactions to your digital records, but you do not need to scan paper records like invoices or receipts.

How to keep digital records

You need to use a compatible software package or other software (like spreadsheets) that connect to HMRC systems.

If you use more than one software package to keep records and submit returns, you need to link them.

Some ways you can link your software include:

  • using formulas to link cells in spreadsheets
  • emailing records
  • putting records on a portable device to give to your agent
  • importing and exporting XML and CSV files
  • downloading and uploading files

You must have links between the software you use by your first VAT period after 1 April 2021.

The deadlines for sending your VAT returns will not change after you sign up for Making Tax Digital for VAT.

Further details are here.

Making Tax Digital for VAT as a business: step by step

Follow these steps if you’re a business or sole trader and you need to follow the rules for Making Tax Digital for VAT.

Find software that's compatible with Making Tax Digital for VAT

Before you sign up to Making Tax Digital for VAT you will need either:

  • a compatible software package that allows you to keep digital records and submit VAT Returns
  • bridging software to connect non-compatible software (like spreadsheets) to HMRC system

We can help too, talk to us about what software you need.

Alternatively the gov.uk site has a service to search for record keeping software and bridging software.

Check if you can apply for an exemption or opt out from Making Tax Digital for VAT.

You are automatically exempt from Making Tax Digital for VAT and do not need to apply if:

  • your taxable turnover has not been above £85,000 since April 2019
  • you’re already exempt from filing VAT Returns online
  • you or your business are subject to an insolvency procedure

You can still sign up voluntarily.

Apply for an exemption

You can apply if it’s not reasonable or practical for you to use computers, software or the internet to follow the rules for Making Tax Digital for VAT.

This could be because:

  • of your age, a disability or where you live
  • you object to using computers on religious grounds
  • of any other reason why it’s not reasonable or practical

HMRC will consider each application on a case-by-case basis.

Watch webinars and videos for help with Making Tax Digital for VAT

Contents

  • How Making Tax Digital for VAT affects your business
  • Getting ready for Making Tax Digital
  • Getting compatible accounting software
  • Keeping VAT records digitally
  • Agent services and Making Tax Digital
  • Signing up for Making Tax Digital for VAT
  • Making Tax Digital for Income Tax Self-Assessment

Click here to watch the guidance.

We're ready to chat MTD 

Working Example

A business uses one piece of accounting software to record all sales and purchases, this software then calculates the return and submits it to HMRC. As well as the records in the accounting software the business uses a spreadsheet to keep track of a fleet of cars and work out its road fuel scale charges. The draft guidance suggests that the business can type the adjustment into its accounting software.

We can of course work with you to make sure that your accounting systems will comply or if you wish to voluntarily join MTD. Remember that MTD for VAT will not be mandatory where turnover is below the VAT £85,000 per annum until April 2022.

Time to Embrace

Embracing digitisation opens many new doors, improving efficiency and capabilities. Short term solutions, relying on old systems is difficult when they are not built to meet the latest MTD requirements. The current pandemic and economic problems will add more pressure if you are lagging behind your competition with dated systems too.  There are reporting and audit challenges especially where amendments, corrections and adjustments are concerned.  By automating VAT, many days previously spent collating, identifying and inputting VAT will be saved.  You will then discover the cost and resource savings of MTD. It frees up time to consider further process and efficiency improvements.

Migration

New technologies also bring easier functionality, especially where employees working from home.  Many software providers hold online training workshops and the software improves agility.  It's a good time to consider a new system, when there's a VAT deferment and the delay of MTD.  Cashflow pressure has eased so it's a great opportunity to gather and validate data at source and reduce errors

The Sign up process

Notification to HMRC has to be made via their website that the business needs or volunteers to comply with MTD. Secondly, the business must connect the MTD compatible software to HMRC’s systems (which should only be done once the confirmation email is received back from HMRC, acknowledging the successful sign up).

It can take up to 72 hours for HMRC to confirm each sign up, this shouldn’t be left until the point at which the submission is to be made.

If we submit your VAT returns we will complete the sign-up process on your behalf nearer the deadline. If you are submitting your own VAT returns and would like any advice about MTD, please get in touch with us as soon as possible or email Stewart Davy stewart.davy@argentsaccountants.co.uk.