Making Tax Digital Update - July 2018
Businesses who are VAT registered and have a taxable turnover exceeding the VAT registration threshold on 1st April 2019 will have to adhere to the new rules for the accounting periods commencing on or after this date. For businesses using annual accounting, they will be required to follow the MTD rules for the first period commencing on or after 1st April 2019.
For businesses that are VAT registered and below the threshold, MTD will be optional. However, once a business is within the scope of MTD they will remain within the scope even if their taxable turnover falls below the threshold.
Under the new rules impacted businesses will need to use compatible software to maintain digital records, calculate the VAT return and submit it to HMRC via an Application Programme Interface (‘API’). The current online portal for VAT return submission will not be available to businesses within the scope of MTD.
Compatible software must be able to:
- Record and preserve electronic records in an electronic form
- Provide to HMRC information and returns from the electronic records in an electronic form and by using the API platform, and
- Receive information from HMRC via the API platform
The complete set of digital records to meet MTD requirements do not all have to be in one piece of software but where more than one piece of software is used there must be a digital link between the pieces of software.
HMRC are planning to allow a 12 month soft-landing period during which record keeping penalties will not apply where a business does not have a digital link between the software and spreadsheets used to calculate the VAT return. This period is intended to allow businesses time to adjust and adapt their accounting systems to accommodate the new rules. However, during this period businesses will still be required to submit their VAT returns to HMRC via Application Programme Interface (‘API’) software.
We have set out the answers to some frequently asked questions below:
What is a digital link?
A digital link is a transfer or exchange of data electronically between software programs, products or applications without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between 2 or more pieces of software. HMRC state that this can include emailing a spreadsheet containing digital records so it can be imported to software to carry out a calculation, transferring by portable device, XML, CSV import and export, and download and upload of files, automated data transfer and API transfer.
What are the Record Keeping Requirements?
Under MTD business records must be kept digitally within compatible software. HMRC recognise the role spreadsheets play in VAT compliance and that businesses can continue to use such programs. However, any business choosing to do so must ensure that these are able to meet the MTD requirements. In order to meet the requirements, the spreadsheet will likely require an add-on or another piece of software (bridging software) capable of extracting the information digitally and sending it to HMRC via an API, creating a digital link. HMRC are clear that ‘bridging software’ will be available by the various software providers but they have not said how this will work or when it will be available.
Transaction Data - Each Supply the Business Makes
In addition to the basic information (the business name, address, VAT registration number and details of any accounting schemes operated), the business must record at the invoice level:
For each supply the business makes:
- The value of the supply
- The time of supply
- The rate of VAT charged
A business can record the total value of supplies on each invoice that have the same time of supply and rate of VAT charged.
The business must also have a record of output values for the period split between standard rate, reduced rate, zero-rate, exempt and outside the scope outputs.
Transaction Data - Each Supply the Business Receives
For each supply the business receives:
- The time of supply
- the value of the supply incuding any VAT that is claimable by them
- The amount of input tax that they will claim
If more than one supply is on an invoice they can record the totals from the invoice.
What information should be held in the VAT Account?
Under MTD, the information required to be held in the VAT account must be held digitally and this information will be used by the software to complete the VAT return.
To show the link between output tax on the VAT return and their records, a business must have a record of:
- The output tax due on sales
- The output tax due on EU acqusitions
- The tax they are required to pay on behalf of their supplier as a reverse charge
- The input tax they are entitled to claim
- The input tax allowable on EU acquisitions
- The tax they are entitled to be paid or claimed following a correction, error adjustment or any other adjustment required by VAT rules
- Any other adjustments allowed or required by VAT rules
Agents can still submit the returns of their clients as long as they are authorised and have access to the compatible software that holds the mandatory records of the business.
Special Schemes and Calculations
- Partial exemption – this is classed as an adjustment and can be calculated without the need for a digital link. It is just the total adjustment that is required digitally
- Retail schemes – if a business accounts for VAT using a retail schemes they must keep a record of their Daily Gross Taking (DGT).
- Flat rate scheme – a business does not need to keep digital records of purchases unless they are capital expenditure goods on which input tax can be claimed (>£2000)
- Gold special accounting scheme – a business must record the value of sales made under the schemes and total output tax on gold purchased under the scheme
Are there any exemptions from Making Tax Digital?
If any of the following apply a business does not have to follow MTD rules:
- The business is run entirely by practising members of a religious society whose beliefs are incompatible with the requirements of the regulations, or
- It is not reasonably practical for reasons of age, disability, remoteness of location or for any other reason, or
- They are subject to an insolvency procedure.
Exemptions should never be presumed and should be agreed with HMRC.
Contact our Making Tax Digital for VAT Team: