Making Tax Digital (MTD) for VAT

Making Tax Digital (MTD) for VAT will be implemented for VAT returns beginning on or after 1 April 2019. Under this regime, all business with a taxable turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide information to HMRC using functional compatible software.

Taxable turnover is turnover that has a VAT liability of the standard rate, reduced rate or zero rate. It excludes supplies that are exempt from VAT, and also overseas supplies that are outside the scope of UK VAT. Businesses will need to know what their taxable turnover is and, if currently below the threshold, monitor this level so that they know when compliance with the scheme is required. Once you are in the regime, you have to stay in even if your taxable turnover drops back below the threshold.

Functional compatible software is software that is capable of connecting digitally to HMRC’s systems using an Application Programming Interface (API). The software must be capable of keeping digital records in the form specified by the new rules, submitting VAT return data digitally to HMRC, and receiving information from HMRC.

How the system works

The principles of MTD are threefold:

1. Digital retention of records using functional compatible software; 2. Digital links between all parts of the accounting system from which the VAT return is generated; and 3. Digital submission of the VAT return to HMRC’s systems.

As part of HMRC’s “soft landing”, item 2 will only be mandatory for return periods commencing on or after 1 April 2020. This gives business with more complex affairs, e.g. group VAT returns or partial exemption calculations, more time to prepare.

HMRC have not defined “digital link”, but they have confirmed that in their view, linked cells in a spreadsheet are digital links but figures copied and pasted from one cell to another are not.

Software

Keeping digital records will not mean businesses are mandated to use digital invoices and receipts, but the actual recording of supplies made and received must be digital. Manual records such as written ledgers will no longer be allowed as a matter of law. Software will not be available from HMRC, but a list of software providers who have tested their software as part of the pilot has been published. This includes many commonly used software providers such as Sage, QuickBooks and Xero, although for desktop products only the latest versions are likely to be supported.

The use of spreadsheets will be allowed, but they will have to be combined with add-on software to meet HMRC’s requirements. We will be acquiring software that is capable of submitting VAT returns from spreadsheet records so this will remain an option for clients using spreadsheets for whom we prepare and submit the VAT returns.

Example

A business may use one piece of accounting software to record sales and purchases, transferring the totals into a spreadsheet to calculate the VAT return. The information is then sent to a piece of bridging software to submit the VAT return to HMRC. Here three pieces of software are involved. To qualify as functional compatible software, the links between them will have to be digital i.e. no manual copying or retyping of data is allowed.

Digital records must be preserved in functional compatible software for six years. The information to be kept and preserved digitally includes:

Designatory data

• The business name, address and VAT number; details of any special VAT schemes used

For each supply made (sales)

• The time, value and VAT rate of the supply

For each VAT period

• The total outputs (supplies) split between standard-rated, reduced-rated, zero-rated, exempt and outside the scope (this is a breakdown of the “Box 6” figure on the VAT return)

For each supply received (purchases)

• The time and value of the supply and the amount of input VAT you can recover

Retailers do not need to record each individual supply but can continue to record Daily Gross Takings.

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