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Making Tax Digital for VAT. A blog by Dafydd Jones – Director Obp Chartered Accountants.

 

It is now less than 9 months or 3 VAT quarters until businesses need to comply with the Making Tax Digital requirements to submit their VAT returns.

 

We have been working with the main software suppliers in the country to see what software best suits our clients to ensure they can comply with their regulatory requirement in the most cost-efficient way.

 

Who needs to follow the MTD for VAT rules?

From 1 April 2019, if your taxable turnover is above the VAT registration threshold (currently £85,000) you must follow the VAT rules set out in VAT Notice 700/22.

If you subsequently drop below the threshold you will need to continue following the MTD for VAT rules. If you deregister for VAT you will obviously fall outside the scope of MTD for now.

There are some limited exemptions from these requirements where you can choose not to apply although I cannot see any of my clients falling within this criteria. They are:

  • Business is run entirely by practicing members of a religious society with incompatible beliefs.
  • It is not practical for you to use digital tools due to age, disability, remoteness of location, or any other reason.
  • You are subject to an insolvency procedure

MTD for VAT will apply for the first VAT period starting on or after 1 April 2019.

HMRC have provided some examples of how this will work in practice:

Example 1 – Existing business with taxable turnover above the VAT registration threshold on 1 April 2019

A business submits a quarterly return covering the period 1 March to 31 May 2019. The business taxable turnover exceeds the VAT registration threshold and therefore the business will need to comply with Making Tax Digital rules for the period starting 1 June 2019.

Example 2 – Business with a taxable turnover above the Making Tax Digital threshold at the point they need to register for VAT

A business that is not registered for VAT is required to register from September 2019 because the taxable turnover over the previous 12 months has exceeded the VAT registration threshold. The business must follow the rules in this notice for all VAT Returns they are subsequently required to make as their taxable turnover was above the VAT threshold when they were required to register.

Example 3 – VAT registered business with taxable turnover below Making Tax Digital threshold until November 2019

A business is registered for VAT but its taxable turnover is below the VAT registration threshold until November 2019. The business must follow the rules in this notice for any VAT period that starts on or after 1 December 2019 as its taxable turnover now exceeds the VAT registration threshold.

 

 

 

 

Digital record keeping

 

The content of the VAT return will look the same with the same 9 boxes needing to be completed. However, the way those records are produced will change.

Under MTD for VAT, some business records must be kept digitally, with functional compatible software.

Functional compatible software is a program that can:

  • Record and preserve digital records
  • Provide HMRC information and returns from data held in those records by using the API platform
  • Receive information from HMRC via the API (Application Programming Interface) platform.

There must be ‘Digital Links’ between software programs or applications where more than one part of the software makes up the digital data submitted to HMRC.

There has been lots of discussions as to whether spreadsheets could be used for digitised records. Spreadsheets can only be used if there is a digital link between the contents in the spreadsheet and the software used to create the data transfer to HMRC. You cannot manually copy the entries on a spreadsheet onto a separate piece of compatible software.

Digital links will not be required for the first year of mandation (April 2019 – March 2020). In that period, ‘cut and paste’ (or more usually ‘copy and paste’) will be acceptable.

From 1 April 2020, digital links must exist between bookkeeping software.

HMRC acknowledge that some manual calculation adjustments may be required. For example, partial exemption, VAT Flat rate and Capital Goods Scheme adjustments

The type of data that must be kept digitally are:

  • Designatory data:
    • Business name
    • Principal place of business address
    • VAT registration number
    • Details of any VAT accounting schemes you use
  • Supplies made that are included in the VAT Return:
    • Time of supply
    • Value of the supply
    • Rate of VAT charged
    • You do not have to record Mixed supplies subject to different rates that are included in a single price separately. You can record the total value and total VAT due.
    • Where a third party agent makes a supply on your behalf, you do not have to keep digital records in respect of that supply until you have received the information from your Agent.
  • Supplies received:
    • Time of supply
    • Value of supply
    • VAT you are claiming
    • Where claiming VAT on employee expenses reimbursed, this can be entered as one line per employee, with the total value and total VAT due. You do not have to record each purchase separately.
    • If you receive Reverse chargesupplies, you will have to enter the purchase and the deemed self-supply separately if your software does not automatically deal with this.
  • Adjustments and errors:
    • Where the amount of VAT changes as a result of an adjustment or error correction, you do not have to amend the digital record of the supply.
    • The VAT Notice includes the following examples:

HMRC have provided examples:

 

Example 1

A partly exempt business software allows it to record amounts of VAT relating to both exempt and taxable supplies. At the end of the period they complete a partial exemption calculation and put the adjustment into their return. The calculation is not completed in the software. The business does not have to go back and change each line in the software to reflect the amount of recovery on each invoice.

Example 2

A business has a software package that requires a period to be closed before the return can be completed. After the period has been closed the business is calculating adjustments before submitting the return. Invoices are found that should be included on the return. The business can enter the figures as an adjustment to ensure the return is correct, but they must record the invoices in their functional compatible software to complete their digital records.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

Example 3

A business notices an error in its records. The total value of the error is £65,000 so the business must correct the error using error correction method 2. The business does not have to make any changes in its functional compatible software, but must keep all records as normal.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

More details have been provided for businesses using specific VAT Schemes:

  • If operating the retail scheme, the Daily Gross Takings (CGT) must be recorded digitally. You do not have to keep a separate record of the supplies that make up the DGT.
  • If operating the Flat Rate Scheme (FRS), you do not need to keep a digital record of purchases which are not capital goods on which VAT can be claimed. You do not need to keep a digital record of the relevant goods used to determine if you are a Limited cost trader.
  • The additional records required to be kept for those using the Margin Scheme, do not need to be kept in digital form.

We, as your agents will be able to assist you throughout the process.

  • You can authorise HMRC to receive data from and send data to an agent.
  • Once authorised the agent can sign up your business to the MTD service and use software to create, view, edit, and send data to HMRC.
  • Your agent can also be authorised to keep and maintain digital records on your behalf.
  • You will not need to re-authorise agents already authorised to receive your VAT returns.
  • You can have more than one agent performing different MTD functions.
  • The agent will need to sign up to the new Agent Services account.

Please note these changes are just a part of the changes HMRC have outlined to meet their target of making HMRC the most digitally advances tax regime in the world.

More changes are to follow!

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