Andrew Needham looks at the introduction of making tax digital from a VAT perspective.
As part of the introduction of making tax digital (MTD), businesses registered for VAT with a taxable turnover above the VAT registration threshold of £85,000 will need to keep VAT records digitally and file their VAT returns using MTD compatible software. This will start from their first VAT period commencing on or after 1 April 2019.
Who is in – and out?
Businesses with a taxable turnover that has always been below the VAT threshold will not have to operate MTD, even if they are VAT registered, but can do so voluntarily.
As part of the guidance HMRC is publishing on the introduction of MTD, they have produced a new Public Notice – VAT Notice 700/22 (‘Making Tax Digital for VAT’), replacing the Draft VAT Notice 200/21 published at the end of 2017.
The new notice gives guidance on the digital record keeping and return requirements for MTD for VAT and provides extensive examples and flowcharts of what will be required from businesses. A number of sections of the Notice now have the force of law.
There are certain limited exemptions from MTD if HMRC is satisfied that:
the business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers);
it is not reasonably practicable to use digital tools to keep the business records or submit returns, for reasons of age, disability, remoteness of location or for any other reason; or
the business is subject to an insolvency procedure.
Digital records
Under MTD, certain records must be kept digitally within functional compatible software.
Most businesses keep their records digitally; the difference under MTD is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT Returns using the information maintained in those digital records, and communicating with HMRC digitally via HMRC’s application programming interface (API) platform.
HMRC say they expect that there will be software products available that will perform all of the required functions, while others will not. For example, a spreadsheet or other software product that is capable of recording and preserving digital records may not be able to send or receive information through the API platform. It can still be a component of functionally compatible software if it is used in conjunction with one or more programs that do perform these functions.
For example, a business uses a spreadsheet to record all sales, purchases, and expenses in a digital format. The VAT Return is then prepared within the spreadsheet, using formulae already written into the spreadsheet. The VAT Return information is then sent via a mandatory digital link to bridging software, which digitally submits the information directly to HMRC.
Happy ‘landings’!
HMRC will allow a period of time (‘the soft-landing period’) for businesses to have in place digital links between all parts of their functional compatible software.
For the first year of mandation (VAT periods commencing between 1 April 2019 and 31 March 2020), businesses will not be required to have digital links between software programs. The one exception to this is where data is transferred, following preparation of the information required for the VAT Return, to another product (for example, a bridging product) that is API-enabled solely for the purpose of submitting the nine box VAT return data to HMRC. The transfer of data to this product must be digital.
Practical Tip:
Businesses will need to ensure that their accounting packages are compatable with MTD by 1 April 2019.
