Making Tax Digital for VAT
How to Prepare
In particular, there is a new £400 per return penalty if you file a return but do not use functional compatible software.
There are additional penalties if the business does not keep its records digitally. HMRC may charge you a penalty of between £5 to £15 for every day on which the business does not meet that requirement.
Key extracts from HMRC guidance include:
You must file your VAT return using functional compatible software
Functional compatible software means a software program, or set of software programs, products or applications (apps) that can:
MTD became mandatory for all VAT registered businesses on the 1 April 2022.
From 1 April 2022, all VAT registered businesses need to have signed up to Making Tax Digital for their first VAT return starting on or after 1 April 2022.
We can sign you up to MTD, although you will be responsible for meeting your VAT obligations. Those who do not join Making Tax Digital for VAT may be charged a penalty for failure to do so.
Previoulsy only VAT registered businesses making taxable supplies in excess of the £85,000 VAT registration threshold are mandated to comply with Making Tax Digital (MTD) rules. Those rules require the business to keep digital business records and send VAT returns using MTD-compatible software.
MTD for VAT is now being rolled out to all VAT registered businesses from April 2022 which may cause some traders who are VAT registered but below the threshold to consider deregistering to avoid having to comply with MTD for VAT. If you decide to do so you will need to complete Form VAT7 and account for output VAT on the market value of stock and assets still owned at the date of deregistration. This is where input VAT has been reclaimed on those assets.
There is however a £1,000 de-minimis which means that output VAT does not need to be accounted for where the combined market value of the assets is less than £6,000.
Unfortunately, deregistering for VAT will not necessarily sidestep MTD as the requirement to keep business records digitally will be introduced for income tax from April 2023. From then MTD for income tax will apply to businesses with gross income in excess of £10,000 a year which will include property landlords as well as traders and professionals.
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.
The government states that MTD helps taxpayers get their tax returns right by reducing common mistakes as well as saving time managing their tax affairs and is a key part of the overall digitalisation of UK tax.
Evidence shows MTD is succeeding in its central aims of reducing errors, while also making it faster to prepare and submit returns and boosting productivity for businesses. New research, conducted by HMRC and peer reviewed by independent academics, shows MTD is likely to have generated increased revenue for the Treasury, through reducing errors in both 2019 and 2020.
Nearly 1.6 million taxpayers had joined MTD for VAT as of December 2021 with more than 11 million returns successfully submitted.
VAT-registered businesses that have not yet signed up to MTD for VAT should do so now. All VAT-registered businesses must use MTD for VAT for their first VAT return period that starts on or after 1 April 2022. For any business concerned about this, we can help to choose the software that is right for you, whether that is one of the simple free options available, or a more advanced product for those with more complex affairs.
Please contact us about MTD – we are here to help!
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.
This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you.
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. This applies to all VAT registered businesses.
This notice explains:
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.
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:
Records you must keep digitally:
You must keep some records digitally within your functional compatible software. This is known as your ‘electronic account’. Your electronic account must contain:
All transactions must be contained in your electronic account, but you do not need to scan paper records like invoices and receipts.
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:
You must have links between the software you use by your first VAT period after 1 April 2022.
The deadlines for sending your VAT returns will not change after you sign up for Making Tax Digital for VAT.
Further details are here.
Follow these steps if you’re a business or sole trader and you need to follow the rules for Making Tax Digital for VAT.
Before you sign up to Making Tax Digital for VAT you will need either:
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.
You are automatically exempt from Making Tax Digital for VAT and do not need to apply if:
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:
HMRC will consider each application on a case-by-case basis.
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.
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.
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.