Making Tax Digital for VAT guidance issued

HMRC have now issued their detailed guidance on the digital record keeping and return requirements for Making Tax Digital (MTD) for VAT.

VAT Notice 700/22 clarifies that spreadsheets may still be used to keep business records provided that there is bridging software that links to the Government gateway.

There will however be a one year “grace” period during the first year of MTD when businesses will not be required to have digital links between software programs, referred to in the VAT Notice as a “soft landing”.

The VAT notice includes a number of helpful examples illustrating different accounting systems and the digital links required to comply with MTD for VAT.

The VAT notice is essential reading for all VAT registered businesses.

WHEN DOES MTD FOR VAT START?

The Making Tax Digital rules apply from your first VAT period starting on or after 1 April 2019. A ‘VAT period’ is the inclusive dates covered by your VAT Return.

For example, where a business submits quarterly returns covering the periods to 28 February, 31 May, 31 August and 30 November, the business will need to comply with Making Tax Digital rules for the VAT quarter starting 1 June 2019 and ending on 31 August.

“SOFT LANDING” FOR MTD FOR VAT FOR THE FIRST YEAR

For the first year of MTD for VAT (VAT periods commencing between 1 April 2019 and 31 March 2020) businesses will not be required to have digital links between software programs. The one exception to this is where data is transferred, following preparation of the information required for the VAT Return, to another product (for example, a bridging product) that is Application Programme Interface (API) – enabled solely for the purpose of submitting the 9 Box VAT Return data to HMRC. The transfer of data to this product must be digital.

For the first year of MTD for VAT (VAT periods commencing between 1 April 2019 and 31 March 2020), where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.

However, for VAT periods starting on or after 1 April 2020, there must be a digital link for any transfer or exchange of data between software programs, products or applications used as functional compatible software.

USE OF SPREADSHEETS IN PREPARING VAT RETURNS

Example 3 in the VAT Notice describes a business that uses a spreadsheet and bridging software from April 2019, which allows the information to be transferred to HMRC via an API.  It uses a spreadsheet to record all sales, purchases, and expenses in a digital format. The VAT Return is then prepared within the spreadsheet, using formulae already written into the spreadsheet.

The VAT Return information is then sent via a mandatory digital link to bridging software, which digitally submits the information directly to HMRC.  Example 6 shows how a spreadsheet would be acceptable in order to consolidate VAT information prior to submit a Group VAT return.

If you haven’t already done so, please contact us to help you get ready for this significant change in VAT accounting and reporting.

Making Tax Digital delayed further, apart from VAT reporting

making tax digital

HM Revenue and Customs (HMRC) have confirmed that no further making tax digital (MTD) for business changes will be brought in before 2020 at the earliest.

The Treasury set out its revised priorities for current digital transformation projects, to make room for the additional demands on its resources of work to upgrade customs systems in preparation for Brexit.

The HMRC statement notes that the convergence of business taxes from the current range of IT systems onto a single system will now happen at a slower pace. This will slow the creation of the single account for all business customers.

For individuals, the introduction of further digital services will be delayed, with progress on simple assessments and real time tax code changes put on hold for the time being.

Note that the introduction of VAT reporting under MTD is still scheduled to commence in April 2019 for those VAT registered businesses with turnover over the £85,000 VAT registration threshold.

Does your accounts system comply with Making Tax Digital (MTD) for VAT?

making tax digital

Making Tax Digital (MTD) for VAT is scheduled to start in April 2019 which means that your VAT information needs to be submitted to HMRC digitally.

On 18 December 2017, HMRC published draft legislation together with examples of how the business account records might link with the HMRC computer in order to comply with MTD for VAT. The legislation specifies that “functional compatible software” must be used to record and preserve prescribed VAT related data.

What are Digital records?

“Functional compatible software” must be used to calculate the VAT due, report the VAT figures (as per the current VAT return) to HMRC, and to receive information back from HMRC.

VAT related data for each sale and purchase made by the business includes the time of the supply, the value and the rate of VAT charged, or in the case of purchases, the amount of input VAT allowed.

There is no requirement in the draft regulations that the electronic recording of this data must be done at the time the supply is made, or when the purchase is received. As long as the data is recorded electronically by the earlier of the date that the VAT return must be submitted, or is actually submitted.

Digital Links in the Trail
The business can use more than one piece of software to keep its digital records, but those separate software programmes must be “digitally linked”. HMRC provides examples of what it means by digitally linked in the draft notice.

One example is a business which 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 with the new VAT rules before they start in 2019.  Note that MTD for VAT will not be mandatory where turnover is below the VAT registration limit, currently £85,000 per annum.

Contact us if you need any help with any of the above.

Making Tax Digital

66204538 - businessman hands typing something on smart phone sitting at his office. close up view. mobile applications, communicating, playing games, social media, organizing work or wireless technology concept.

These changes apply to everyone including you: 

HM Revenue & Customs (HMRC) are making revolutionary changes to the tax system which will be launched in 2018. These changes are named Making Tax Digital (MTD). But what does Making Tax Digital mean for businesses and you?  In practical terms Making Tax Digital impacts on your business by requiring the mandatory keeping of digital records in a format acceptable to HMRC and the submission to HMRC of quarterly accounts figures.

What is it? 

  • HMRC is rolling out Digital Tax Accounts and with that, digital record keeping for businesses and landlords. The self-employed, companies and some individuals will need to submit details of income and expenditure on a quarterly basis plus a final year-end update.
  • New businesses will need to make a first return within four months of start-up.
  • MTD is intended to improve the accuracy of business records and minimise errors through the use of new technology.
  • At present, there are no plans to change the tax payment dates although a voluntary ‘pay as you go’ system will be introduced.

Who does it affect?

  • MTD will affect all businesses, including landlords; very few will be exempt. The main exemption will be for landlords and the self-employed with turnover below £10,000.
  • Some businesses may apply for an exemption on the grounds of insufficient internet infrastructure (however, HMRC expects this to be minimal), religion or medical conditions (these will be checked rather than accepted at face value).
  • Charities and community amateur sports clubs will also be exempt, but can voluntarily comply.

What does this mean? 

  • Businesses will have to submit details of their income and expenditure electronically on a quarterly basis, with a month to do this from the end of each quarter.
  • The quarterly updates and the year-end adjustments will be compulsory, and there will be penalties for non-compliance.
  • You will have to start keeping your accounting records and books digitally to allow the transfer of the data to HMRC in the prescribed format.
  • HMRC will not provide software; businesses will need to buy their own MTD compatible software. It is expected that free software will be available to the smallest businesses only.
  • MTD will apply for most unincorporated businesses and landlords for income tax and National Insurance from April 2018. There will be a one year delay for small businesses and landlords where the annual turnover is less than the VAT threshold.
  • MTD will apply from April 2019 for VAT and from April 2020 for corporation tax.

The Solution

  • The revolutionary changes to the tax system mean that the partners and staff of Saint & Co are actively involved in MTD, including attending courses to keep up-to-date with the latest HMRC legislation & guidelines. We are also working with our accounting software suppliers so that we can provide clients with the accounting package necessary to enable you to keep your ‘Digital Accounting Records’ as required by HMRC.
  • As yet HMRC have not issued the final definitive guide to MTD but we do have an outline of the new system. We will over the next year provide further information and discuss with you, the improvements or necessary changes required to your accounting systems and records so that you conform with HMRC requirements.
  • Should you wish to discuss MTD sooner then please do not hesitate to contact the partner looking after your affairs.
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