With just over four months to go before Making Tax Digital (MTD) is introduced many VAT registered businesses need to prepare now.
If you must join MTD and already use software or spreadsheets to keep accounting records you need to make sure these records will be compliant with the new regulations.
If you must join MTD and use manual or partially manual accounting records you need to have plans on how you are going to introduce a fully digital system by the deadline.
The pilot scheme for Making Tax Digital for VAT has been now open for a few weeks and HMRC are adamant that the full version will start on 1 April 2019, although for some types of business MTD will start on 1 October 2019 (see below). MTD affects all businesses that are registered for VAT because they have to be registered; that means registered businesses whose annual turnover liable to VAT, including zero-rated turnover, is above the deregistration threshold of £83,000. These businesses must join MTD from the start of the first VAT period that begins on or after 1 April 2019.
Other points to note:
- Businesses that go over the registration threshold after 1 April 2019 and must register for VAT must also join MTD.
- Businesses that must join MTD must apply to join MTD – it is not automatic. Once in MTD businesses must stay in MTD unless they are able to deregister for VAT.
- Exemption from MTD can be claimed if the business is genuinely unable to use digital records or unable to access the internet. This can be on religious, age or disability grounds, or if the internet is unavailable due to the business’s location. This exemption must be applied for.
- Businesses that are registered for VAT but do not have to be registered (so-called voluntary registrations) do not have to join MTD. These businesses can join if they wish to.
The main features of MTD for VAT are:
- VAT records must be kept digitally (electronic records).
- The digital format must be compliant with HMRC’s software requirements and provide the information HMRC requires in digital form. Many software suppliers have now published MTD compliant software and others are in the process of doing so.
- Businesses should keep in contact with their accounting software suppliers to make sure that they are using the correct version. HMRC regularly publish a list of software suppliers who can supply approved MTD compliant software.
- Businesses that use manual or partly manual records should be urgently looking at acquiring suitable software and planning how to manage the change to digital records.
- Spreadsheets are an acceptable form of digital records but the information must be accessible to HMRC’s software, and so specialist software will be required to provide a bridge from the data in the spreadsheet to HMRC’s software. The spreadsheets must contain the all information needed to constitute VAT records.
- The definition of VAT records has been amended. For example, sales must be analysed between standard rated, reduced rated, zero rated and exempt sales. Software programs should automatically meet the definition as long as the right data is entered. More care will be needed with spreadsheets. There is some permanent information about the business that must be held in the software, or on a spreadsheet, if spreadsheets are being used.
- VAT returns must be submitted directly to HMRC from the digital records.
- Businesses in MTD will no longer have access to the HMRC portal that allows them to complete VAT returns online. They must have software that can handle the submission automatically from the digital records. If using spreadsheets for digital record-keeping, submission will have to be made using special “bridging” software.
- Agents will still be able to file on behalf of clients but must have software that can handle the digital filing.
- Adjustments to the figures should be made within the accounting software so that the return produced by the software is suitable for filing.
- If use of “linking” spreadsheets is unavoidable, such as where information for the return is collated from different systems, or where complex adjustments need to be made, the data must be transferred automatically from the source software; data must not be re-keyed manually. However, if necessary, in the first year of MTD businesses will still be able to re-key data manually into linking spreadsheets while the digital data transfers are put in place. Bridging software will still be required to handle submission of the return data from the spreadsheet to HMRC.
Deferred entry to MTD
The following businesses will join MTD on or after 1 October 2019:
- VAT groups. VAT divisions
- Unincorporated clubs and not for profit organisations
- Certain Government departments, including NHS Trusts
- Local authorities
- Traders based overseas
- Traders making payments on account
- Traders in annual accounting