Making Tax Digital for Business (VAT)

What is Making Tax Digital, whom will it affect and what is the timeline?

Making Tax Digital (MTD) will require taxpayers to move to a fully digital tax system, but this first phase applies only to VAT. The first phase of HMRC’s Making Tax Digital regime, MTD for VAT, will be implemented on 1 April 2019.

Regulations amending existing VAT laws to include MTD for VAT were laid before parliament in February 2018. Under these regulations, businesses with taxable turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using ‘functional compatible software’.

“Taxable turnover” means the total value of supplies, other than supplies which are exempt from VAT. Businesses with taxable turnover below the VAT threshold but which are voluntarily registered are not within scope of the MTD for VAT regulations, although those businesses can choose to join if they wish to. Once taxable turnover exceeds the VAT threshold, compliance with MTD for VAT becomes compulsory.

For those with taxable turnover above the VAT threshold on 1 April 2019, compliance with the regulations is mandatory for VAT return periods beginning on or after 1 April 2019, unless an exemption applies. 

The wider roll out of MTD, for example to income tax, has been delayed until 2020 at the earliest.

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How are the records to be kept?

Keeping digital records will not mean businesses have to use digital invoices and receipts, but the actual recording of supplies made and received must be digital.

Example:

A business may use one piece of accounting software to record sales and purchases, transferring the totals into a spreadsheet to calculate the VAT return. The information is then sent to a piece of bridging software to submit the VAT return to HMRC. Here three pieces of software are involved. To qualify as functional compatible software, the links between them will have to be digital. The MTD for VAT notice explains that a digital link is one that involves no manual copying of data, or using a “cut and paste” function.

Software

HMRC recently published VAT Notice 700/22: Making Tax Digital for VAT. The notice defines ‘functional compatible software’ and details the transaction-level data that needs to be recorded and retained within the software.

Under the new MTD rules, businesses will have to use ‘functional compatible software’. This means a ‘software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)’. This must be capable of:

  • Keeping and preserving records in digital form as specified by the new rules
  • Creating a VAT return from the digital records held in compatible software and submitting this data to HMRC digitally
  • Providing HMRC with VAT data on a voluntary basis
  • Receiving, via the API platform, information from HMRC to ascertain compliance. It is as yet unclear what this means, but it may relate to HMRC’s ability to send compliance prompts and nudges.

Software will not be available from HMRC, but a list of software providers has been published.

For those that use Sage more info on MTD can be found here

For those that use Quickbooks more info can be found here

For those that use Xero more info can be found here

Helping with the challenges

Making Tax Digital is one of the biggest changes to the UK tax system in recent times. Whether you would like some assistance choosing software, staff training on your current software system, or help with transition to a new system, we are here to help you prepare for the challenges MTD for VAT may present for your business.

If you have any questions or would like to know more about how we can help you, please get in touch.

More detail on Making Tax Digital for VAT

  1. Exemptions
  2. Preservation of records
  3. Content of records
  4. The VAT account
  5. VAT schemes
  6. VAT returns
  7. Error corrections

1. Exemptions

Just as there are exemptions from electronic filing at present, there are some exemptions from the MTD for VAT regime, and these follow the same lines. They are for businesses:

  • Which satisfy HMRC that they are practising members of a religious society or order whose beliefs are incompatible with the use of electronic communications
  • To whom an insolvency procedure applies
  • Which satisfy HMRC that for reasons of disability, age, remoteness of location or any other reason, it is not reasonably practicable for them to make a return using an electronic return system.

If HMRC are not satisfied that the person is exempt for any of the above reasons, they will provide digital assistance.

2. Preservation of records

As well as keeping digital records, businesses will have to preserve them in digital form. They will have to preserve digital records in ‘functional compatible software’ for up to six years. Where a business deregisters for VAT, it will have to preserve records for up to six years.

Businesses to which MTD no longer applies will not have to maintain ongoing records in digital format.

3. Content of records

The information to be kept and preserved digitally includes:

  • ‘Designatory data’: this is business name, principal place of business, VAT registration number, information about any VAT accounting schemes used
  • VAT account linking primary records and VAT return
  • Information about supplies made and received

4. The VAT account

The following data will be kept digitally.

VAT payable portion:

  • Total output tax due for VAT return period
  • Total output tax on acquisitions from other EU member states
  • Total output tax on supplies received where the business is required to account for and pay on behalf of the supplier (reverse charge output tax).

VAT allowable portion:

  • Total input tax allowable for VAT return period
  • Total input tax allowable on acquisitions from other EU member states.

Adjustments:

Adjustments made, corrections of errors in calculating VAT payable in previous periods, and any other adjustments made as required by VAT rules (such as retail scheme annual adjustments or partial exemption annual adjustments).

Here however, it is only the total of each adjustment that needs to be kept digitally – not the underlying calculations.

Exceptions:

Where HMRC are satisfied that keeping and retaining the specified information for each transaction is ‘likely to be impossible, impractical or unduly onerous,’ they can vary the detail required to be kept electronically.

The notice also includes some relaxations for recording sales and purchases made by third parties; it will be possible to enter the totals on the third party’s sales summary as one single transaction.

5. VAT Schemes

Retail scheme users will be allowed to record electronically sales transaction data based on daily gross takings, rather than recording details per sale.

Flat rate scheme users will need to record the relevant information in a digital form but the extent of the records will mirror current record keeping requirements.

6. VAT returns

Nine boxes

There will be a minimum of nine boxes to complete the return. The information on the return will ‘be generated by pulling information from the digital records’ – a hands-free process.

Other updates

There is also provision for businesses to make voluntary ‘periodic updates’ – in other words, for them to supply information outside the VAT return cycle.

The exact position is not yet completely clear, but HMRC say ‘We expect a voluntary update outside of the VAT Return cycle to be used mainly when a business is also providing an Income Tax update.’ This presumably looks forward to a next stage in MTD for Business, when the regime also encompasses income tax. HMRC then goes on to say, ‘But it could also be used for example to update HMRC about a change of circumstances (changes to ‘designatory data’).’

Supplementary data

If a business chooses to do so, they can submit supplementary data when submitting their VAT return. The supplementary data will contain a breakdown of the box 6 outputs figure, showing the period totals of standard rate, reduced rate, zero rate, exempt and outside the scope transactions.

HMRC have also stated that, should they select a business for an enquiry, they may look at any supplementary data submitted by the business. This data may satisfy HMRC that they do not need to contact the business after all.

7. Error corrections

The procedure here will broadly be the same as at present with regard to amending VAT accounting records. Corrections to VAT returns already submitted will be made as at present, with non-deliberate errors below the reporting threshold adjusted on the next VAT return, (if within the four year time limit) and other errors reported through VAT652.

HM Revenue & Customs have created a communications pack with information to support businesses that need to make the transition to digital VAT business record keeping.

You can view this information here

Alternatively, if you have any questions or would like to know more about how we can help you, please get in touch with one of our experts.