Making Tax Digital for VAT

As the first quarterly VAT returns are due to be submitted on August 7th under Phase Two of Making Tax Digital for VAT, are you compliant?

Making Tax Digital for VAT is a phased process, with HMRC bringing in gradual changes for certain businesses which are trading above the VAT registration threshold, and required to be VAT registered. The first phase or the ‘soft landing’ eased businesses into digital VAT compliance (i.e. keeping digital records and submitting digitally rather than electronically).  The latest phase for VAT introduces ‘digital links’ between software packages used to prepare VAT return data.  But what does that mean in practice, and how can businesses ensure they are compliant with the rules?

Phase Two came into force for VAT returns beginning on or after 1 April 2021, and focusses on creating and maintaining ‘digital links’ between software packages, essentially to remove manual intervention in the VAT return process to reduce instances of clerical error.

Under Phase Two, there needs to be a digital link from:

When a transaction is first recorded on a digital format (the first part of the digital journey) ——> to the digital submission of the VAT return to HMRC.

For example:

Yellow shaded area shows the digital journey.

What does this mean in practice?

1. Those using a single piece of software to prepare and submit are likely to be already compliant, or may need to make a few minor adjustments
2. Any VAT adjustments need to be made within software, rather than manually altering the Boxes 1-9 of a VAT return before submission
3. Multiple amendments or journals are no longer compliant, so businesses that routinely make corrections or adjustments will need an alternative method
4. Those with complex VAT returns may find it more difficult to be compliant with the new rules
5. It’s not necessary to invest in new software, it is possible to make tweaks to existing processes which are MTD compliant, and usually more cost effective
6. You can continue to use multiple packages to maintain your records, as long as the links between them are ‘digital’

How do I know if I’m compliant?

1. Map your VAT return process & identify areas of non-compliance

How does each transaction get onto the VAT return?  Are there any areas of manual intervention?  How are adjustments made?

2. Correct any areas of manual intervention or adjustment, ensure digital links throughout the VAT return process

Areas to think about:

• Common items manually added to the VAT return (such as petty cash, staff expenses)
• Online sales (how do these get onto the system?)
• Fuel scale charge, and other restrictions on VAT recovery
• Partial exemption calculations

What if I’m not compliant?

Businesses should take steps to increase compliance as far as they are able.  HMRC have said that there will be a ‘light touch’ for businesses who are trying to comply with the rules, but have announced a penalty regime for those who aren’t.

They acknowledge that for certain businesses compliance will be difficult and will allow additional time to comply where they consider it appropriate (you must apply for additional time to prepare).

We can also support you through to MTD compliance, and have a range of options for businesses, from MTD health checks to establish areas of risk or non-compliance, to creating digital links in the VAT process, to preparing and submitting your VAT return to HMRC.

Speak to Gemma McCaldon-Gower or your usual Cowgills contact to find out more.

What do I need to do now?

• Check if the new rules apply to you
• Check which VAT return will be first under the new rules (the first VAT return period starting on or after 1 April 2021)
• Review your existing processes – identify breaks in digital links and areas of manual intervention
• Notify HMRC if you are unable to comply, and assure HMRC you are taking steps to comply