Making Tax Digital for VAT and what it means for your business

Making Tax Digital is almost upon us. On April 1, 2019, HMRC’s new initiative will be launched and businesses will eventually have to submit all their taxes digitally. As we discussed in a previous blog, this will hopefully make it a simpler, more effective UK tax system.

This is a crucial period for UK businesses, with Great Britain set to leave the EU on March 29, just days before Making Tax Digital (MTD) comes into effect. But while, at the time of writing, there still remains a great deal of uncertainty over Brexit, there are no such doubts regarding MTD and the transformation will begin with MTD for VAT on April 1.

Once that has been implemented, MTD for income tax and MTD for Corporation Tax are due to follow, although not before April 2020. However, there is one update regarding MTD for VAT we should all be aware of before April 1.

HMRC have stated that businesses whose taxable turnover exceeds the VAT registration threshold will need to keep their records digitally, using MTD-functional compatible software. The VAT return will have to be created from that software, for return periods starting on or after April 1, 2019, unless the mandation deferral period of six months applies. For the minority of businesses to which the deferral applies, the MTD for VAT obligations will begin for return periods on or after October 1, 2019.

What are the current MTD challenges businesses are facing?

Businesses will face several issues when MTD for VAT comes into force. Here, we take a look at a few:

• Changes to record keeping – Businesses will no longer be able to keep manual records. Digital records must be kept, and they must be used via compatible software
• Changes to VAT return submission – VAT returns must be submitted to HMRC by means of a business’s functional compatible software communicating digitally via HMRC’s API platform, and not by manually entering the VAT return figures on to the HMRC portal
• Timing – MTD for VAT will begin on April 1, 2019, for the majority of affected businesses, which is the same time as the UK is scheduled to leave the EU. Uncertainty around the VAT treatment of transactions between the UK and EU will inevitably arise, and businesses will need to both understand the tax-technical changes to the rules and ensure their accounting systems deal with such transactions correctly

You can get more information on these challenges by visiting tax.org.uk, where a detailed table has been compiled that delves further into the issues that MTD for VAT will create.

How does MTD for VAT affect businesses – what will I have to do?

For VAT-registered businesses with a taxable turnover above the VAT threshold, they will need to:

• Keep/maintain VAT records digitally
• Send VAT returns to HMRC using MTD-compatible software referred to as functional compatible software

When do I need to start following MTD rules?

Businesses must start following MTD rules for the first day of their first VAT period that starts on or after April 1, 2019.

There is no settling-in period available, so that means you must ready by April 1, 2019.

If you do not transfer to MTD, you will be penalised by HMRC.

When does MTD for VAT begin?

Making Tax Digital will begin, for most businesses, on April 1, 2019. For deferred businesses, MTD for VAT begins in October 2019.

From April 2020 and beyond, Corporation and Income Tax will follow suit, so businesses with income between £10,000-£85,000 will be required to follow the same processes.

What is the VAT threshold?

The taxable turnover threshold which determines whether a person must be registered for VAT will remain at £85,000. The taxable turnover threshold which determines whether a person may apply for deregistration will remain at £83,000.

Can HMRC’s VAT portal website be used to file VAT returns?

No, MTD-compatible software must be used. If you or your business already uses accounting software, you will need to make sure it is compatible with HMRC.

If you don’t use digital software, for example relying on Excel or even paper, you will need to implement MTD-enabled software.

What is a deferred business?

MTD for VAT will start for the majority of businesses on April 1, 2019, but for some it will be deferred until October 2019. Among those deferred businesses are:

• Businesses required to make payments on account
• Annual accounting scheme users
• Trusts
• Not-for-profit organisations (not set up as a business)
• VAT divisions
• VAT groups
• Public sector entities that are required to provide additional information on their VAT return
• Local authorities
• Public corporations
• Traders based overseas

Making Tax Digital and VAT groups

Two or more companies or limited liability partnerships – known as ‘bodies corporate’ – can register as a single taxable person or VAT group if:

• Each body has its principal or registered office in the UK
• They are under common control – for example, one or more company is a subsidiary of a parent company

VAT groups are classed as a deferred business, so have until October 2019.

What is classed at MTD compatible software?

There is an abundance of software already available – and some still in development – that will be compatible for MTD for VAT.

Your business must have the correct software before you sign up to MTD but, if you’re already using software to keep records, ask your provider if they plan on making the software compatible with MTD.

Software that is already available allows you to:

• Connect to HMRC systems
• Report VAT information to HMRC
• Allows HMRC to send information to you

An in-depth list of compatible software providers or products, both already available and still in development, can be found here.

What if I am VAT registered but under the threshold?

If your taxable turnover drops below the VAT registration threshold at any point after April 1, 2019, you are still required to continue to keep digital records and send HMRC your VAT returns using MTD-compatible software.

This obligation does not apply if you de-register from VAT or if you are exempt from MTD for VAT.

You need to tell HMRC in writing, either by post or via email. Businesses can opt out if they are under the threshold.

Does MTD for VAT apply to all VAT schemes?

Many VAT schemes, and some, such as the Flat Rate Scheme, are more common than others.

For an explanation of what details must be recorded and preserved digitally, see here.

Any records that currently need to be retained but are not specified can be retained either digitally or in another format (such as paper).

• Flat Rate Scheme – SMEs don’t need to keep a digital record of purchases unless they are capital expenditure goods on which input tax can be claimed
• Retail Scheme – If you account for VAT using the Retail Scheme, you must keep a digital record of your daily gross takings, for example, you make sales using a POS terminal
• Margin Scheme – If you use the Margin Scheme because you sell second-hand goods, works of art, antiques etc, you aren’t required to keep records digitally. Calculation of the marginal VAT charged in digital form is not required, but records must be maintained in some form

Keeping spreadsheets for VAT filing and record keeping

Spreadsheets will not meet all the requirements for MTD for VAT. If spreadsheets are the primary business records of the transactions, then copying and pasting data from a spreadsheet is not permitted under MTD for VAT legislation.

Instead, your business will need to ensure digital records are kept.

Digital records are a digital image or copy of a paper record, for example a photograph, that can be held in an electronic or digital format and which can be accessed on a laptop, a mobile phone, a tablet or a desktop computer.

A digital link will then allow that data to be imported, or exported, between programs without the need for manual intervention.

We’re here to help with Making Tax Digital

RDG Accounting is here to lend a hand and make sure you are ready, and that your transition is as smooth as possible.

We are already helping businesses make the transition to Making Tax Digital and ensuring they meet the deadline.

If you’d like our help or wish to discuss MTD for VAT further with us, please fill in your details below and one of the team will be in touch. Alternatively, give us a call on 0333 200 0714.

Helpful resources

For more information on MTD for VAT, there are a wide number of useful links out there to help you understand and come to terms with what will be required. We’ve picked a few here that will help you:

VAT Notice 700/22

Making Tax Digital: how VAT businesses and other VAT entities can get ready

Making Tax Digital for Business – Stakeholder Communications Pack

Software Suppliers Supporting Making Tax Digital for VAT

Making Tax Digital for VAT timeline