Making Tax Digital for VAT

Whilst HM Revenue & Customs has delayed Making Tax Digital (MTD) for self-assessment until April 2024, there’s no such breathing space for MTD for VAT which will apply for all registered traders from 1^st April this year.

Our previous article on Making Tax Digital for VAT can be found here, but in the meantime, here are some useful tips and reminders for those of you who are not already organised.

Who is affected?

Making Tax Digital for VAT has applied for VAT-registered businesses with turnover above the £85,000 threshold since April 2019. From 1 April 2022, all VAT registered traders, including smaller businesses with turnover less than the threshold must adhere to the rules, and both keep their VAT records digitally, and submit VAT returns through ‘functional compatible software’.

Those who might be affected from April will likely be businesses who are trading below the VAT registration threshold, or those that make zero-rated supplies, on which no VAT is charged, and are VAT registered to recover VAT they incur.

For traders such as these and any newly VAT registered businesses, time is running out. Here are some useful tips to make sure you don’t fall foul of the new rules:

Have you signed up?

You can sign up for MTD online. If you pay by direct debit you need to sign up at least seven days before the first MTD return is due and at least five days after the last non-MTD return.

Is your record keeping up to scratch?

You will be required to keep records digitally using functional compatible software.

Functional compatible software is:

• A software program or set of software programs
• A product or set of products
• An application or set of applications

It must be able to:

• Record and preserve digital records
• Provide HMRC information and returns from data held in those digital records, using the API platform
• Receive information from HMRC, using the API platform

The compatible software needs to store and hold basic information about your business such as your business name, address, VAT number and scheme. It also needs to record details of supplies being made and received including the tax point, value of the supply and VAT rate applied.

You might be able to claim an exemption if you are unable to use a computer or access the internet due to age, disability or remote location.

Watch out for penalties

Currently, there are penalties for late submission of a VAT return and/or for late payment. If you miss a submission deadline, a penalty of up to 15% of the VAT due to HMRC may be charged, unless you can demonstrate that you have a ‘reasonable excuse’.

However, new penalties are on the horizon.  Under the proposed rules, there are separate penalties for late submission of a VAT return and for late payment with both operating on a points-based system. If you miss a submission deadline, HMRC will issue one penalty point. If you accrue too many points in a given period, a penalty of £200 could be applied.

The points threshold will depend on how frequently you submit a VAT return.

Separate tallies will be recorded for VAT and income tax with separate penalties subsequently applied.

This all may sound complicated but there is some good news – whilst HMRC tests its systems, these penalties will not apply for VAT until January 2023 rather than this April as originally planned.

See our previous article on this here.

Consider if you qualify for Help to Grow: Digital

There is a government scheme called “Help to Grow: Digital”, designed to encourage companies with between 5 and 249 employees to benefit from digitisation.

Companies can receive up to £5,000 to cover the cost of 50%of the approved software used.

Get in touch

Our team at Cowgills can support you with MTD compliance, and we have a range of options for businesses, from MTD health checks to establish any areas of risk or non-compliance, creating digital links in the VAT process, and preparing and submitting your VAT return to HMRC.

Speak to Gemma McCaldon-Gower or your usual Cowgills contact if you need our help.