Making Tax Digital Update - July 2020
On 1 April 2019, Making Tax Digital (MTD) for VAT was launched. Although there was a 6 month deferral for certain businesses, all VAT registered businesses with a turnover exceeding the VAT registration threshold should now be maintaining their records digitally and submit their VAT returns via compatible software to HMRC.
HMRC announced on 21 July 2020, that from April 2022, MTD for VAT will apply to all VAT registered businesses.
Under MTD, impacted businesses will need to use compatible software to maintain digital records 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. Any transfer or modification of data once digitally recorded must be done using digital links. Manual transfer is not permitted. An initial 12-month soft-landing period was introduced during which these digital links are not required. This period has been extended by a further 12 months due to the impact of the COVID-19 pandemic. 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 compatible 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 acquisitions
- 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. If you would like our assistance with your VAT filing please get in touch with a member of the Making Tax Digital Team.
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.
Are you ready for Making Tax Digital for VAT? If you’ve not yet got the ability to submit your VAT returns to HMRC through compatible software, then bridging software may be the answer.
At Mitchell Charlesworth we are offering an MTD VAT return submission service to ensure businesses who do not yet have compatible software or would prefer to maintain their current VAT recordkeeping process are able to comply with MTD.
Businesses can choose from a submission only service or upgrade to include the review of the return prior to submission. Opting for the review of the VAT return will include suggestions as to how the process can be updated to comply when the soft-landing period ends, and the VAT return process is required to be more automated.
If you would like to discuss Making Tax Digital in more detail or enquire about our MTD VAT return submission service, we urge you to act quickly and contact our Making Tax Digital team below.
Contact our Making Tax Digital for VAT Team: