Why is it being introduced?
HMRC have introduced new requirements for “Making Tax Digital” to make UK more digitally advanced and allowing individuals and businesses to get their tax right and to keep on top of their affairs. For the moment, it has been introduced for VAT however this will be rolled out to income and corporation tax in subsequent years.
What does it mean?
In simple terms, the requirements are to ensure VAT records are maintained in a digital format and that VAT returns are also submitted through a digital platform.
Further details are noted below.
Who it applies to and from when?
From 1 April 2019, businesses with taxable turnover exceeding the VAT registration threshold (currently £85,000) will need to follow the MTD rules. If you have voluntarily registered with turnover below threshold then MTD does not apply.
MTD will apply from your first complete VAT return period post 1 April 2019. Therefore in most normal circumstances from quarter ending 30 June 2019 onwards.
Digital Record Keeping
VAT records and accounts need to be kept digitally within functional compatible software.
If invoices are scanned into the software then do not need to keep the original, however if only information is inputted into the system from the invoice, then the invoice must be kept. Some records need to be kept in original format regardless e.g. C79 (import Vat certificate).
A functional compatible software needs to record and preserve digital records as well as be able to submit the VAT return to HMRC using API platforms. Such software packages are readily available. A simple spreadsheet can also be used alongside another software package to submit the VAT return to HMRC.
Digital Links
Data transfers and exchanges between the different software programs must also be digital. It is not permissible to transfer data manually e.g. cut and paste. Once data has been entered into the software any further transfers or modifications have to be done digitally. The following are acceptable digital links:
- Emailing a spreadsheet so that information can be imported into another software product
- Transferring digital records onto a portable device (e.g. memory stick) and giving it to someone else to import into software
- Linked cells within a spreadsheet by use of formula
- XML, CSV import and export, download and upload of files
- Automated data / API transfer
HMRC have allowed “soft landing“ regarding digital links requirements. For the first year of MTD HMRC will not require digital links to be in place, however it becomes mandatory after this grace period.
Records that must be kept digital
Information that must be kept in a digital record:
- Business name
- Principal place of business address
- VAT registration number
- Any VAT accounting schemes used
For supplies made:
- Time of supply i.e. tax point (if cash basis this is receipt date)
- Value of the supply – net value excluding VAT
- Rate of VAT charged
Where more than one supply is recorded on invoice and these are within the same VAT period and charged at the same VAT rate; this can be recorded as a single entry. Otherwise multiple entries maybe required.
For supplies received:
- Time of supply i.e. tax point (if cash basis this is payment date)
- Value of the supply – net value excluding VAT
- Amount of input tax being claimed
There is no requirement to record inputs for the period split by VAT rate (as required for sales). Rather than an invoice, HMRC does permit the use of supplier statements to be used with totals recorded as one entry, subject to all supplies being included in same VAT period.
Other matters
- Where petty cash used for small value items, these do not need to be individually recorded subject to each individual item being below £50 (VAT inclusive) and aggregate value below £500 (VAT inclusive)
- Reverse charge transactions needs to be shown as both supply made and received if software does not record these appropriately.
- Partial exemption calculations can be performed and adjusted separately
- If operating a Retail Scheme, a digital record of the “Daily Gross Takings” is required. There is no need to keep a separate record of each supply in that day.
- If operating Flat Rate Scheme there is no requirement to keep digital records of purchases, with exception of capital expenditure on which VAT being claimed.
Steps to take
Action must be taken to decide the most appropriate software to use for compliance with MTD. As noted in some cases a spreadsheet will be sufficient, however sufficient information will need to be included and data links must be considered.
As agents we can
- act on your behalf to sign your business up for MTD
- use software to maintain your digital records
- submit your VAT returns
- assist you for your own software for MTD purposes
To discuss implications for your business please contact us.