Making Tax Digital for VAT

Making Tax Digital (MTD) for VAT imposed new reporting and record keeping requirements from April 2019 and will be extended to all VAT registered traders in April 2022.

You must have links between the software you use by your first VAT period after 1 April 2021 so it’s important to act now.

Overview

From April 2019 VAT registered businesses and organisations with taxable turnover above the VAT threshold of £85,000 are required to:

• Maintain their accounting records digitally in a software product or spreadsheet. Maintaining paper records no longer meets the requirements of the tax legislation.
• Submit their VAT returns to HMRC using a functional compatible software product that can access HMRC’s API (Application Program Interface) platform.

The requirements do not currently apply to VAT registered businesses with taxable turnover below the VAT threshold, for example those that have registered voluntarily. However, the requirements will apply to all VAT registered traders from April 2022, whatever they earn.

You can choose to sign up to Making Tax Digital for VAT if your business earns less than £85,000.

Monitoring taxable turnover

When working out taxable turnover you should:

• include standard rated, reduced rated and zero-rated supplies; and
• exclude outside the scope and exempt supplies.

The period to be considered when determining whether taxable income exceeds the £85,000 for MTD for VAT purposes is the year to the end of any month (i.e., a rolling 12 months). When the threshold is exceeded for the first time the business must comply with MTD for VAT from the beginning of its next VAT accounting period.

VAT records for MTD

Under the MTD for VAT rules, your business must keep some records digitally, unless:

• your business uses the VAT GIANT service, for example if you’re a government department or an NHS Trust
• you apply for an exemption.

You need to keep the following records digitally:

• your business name, address and VAT registration number
• any VAT accounting schemes you use
• the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
• the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
• any adjustments you make to a return
• the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
• the rate of VAT charged on goods and services you supply
• reverse charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy
• your total daily gross takings if you use a retail scheme
• items you can reclaim VAT on if you use the Flat Rate Scheme
• your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme

You also need to keep digital copies of documents that cover multiple transactions made on behalf of your business by:

• volunteers for charity fundraising
• a third party business
• employees for expenses in petty cash

You must add all your transactions to your digital records, but you do not need to scan paper records like invoices or receipts.

How to keep digital records

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:

• using formulas to link cells in spreadsheets
• emailing records
• putting records on a portable device to give to your agent
• importing and exporting XML and CSV files
• downloading and uploading files

You must have links between the software you use by your first VAT period after 1 April 2021.

The deadlines for sending your VAT returns will not change after you sign up for MTD for VAT.

Exemptions

Businesses do not have to comply with MTD if:

• it’s not reasonably practicable for them to use digital tools to keep business records or submit VAT returns because of age, disability, remoteness of location or for any other reason
• the business is subject to an insolvency procedure
• the business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records

These exemptions mirror the current exemptions from online filing for VAT.

For assistance and advice with signing up for MTD for VAT get in touch.