HMRC is making changes to its tax service from 1 April 2019 – all VAT-registered businesses will need to keep and submit digital VAT business records. What does this mean for you?
The Making Tax Digital (MTD) initiative is being rolled out as part of the government’s ambition to become one of the most digitally advanced tax administrations in the world. And it’s starting with Value Added Tax (VAT) returns.
From 1 April 2019, all VAT-registered businesses (those with a taxable turnover above £85,000) must keep their VAT records digitally, using MTD-compatible software to submit their VAT returns to HMRC.
VAT information that must be kept digitally should include, for each supply of goods or services, the time of supply (tax point), the value (net, excluding VAT), and the rate of VAT charged. It should also include information about your business, including the business name and principal business address, as well as your VAT registration number and details of any VAT accounting schemes you use.
The MTD rules apply to a company or individual’s first VAT period starting on, or after, 1 April 2019. A VAT period is the inclusive dates covered by your VAT Return. HMRC has provided several examples to help you work out the date from which you need to comply.
Existing business with taxable turnover above the VAT registration threshold on 1 April 2019
A business submits a quarterly return covering the period 1 March to 31 May 2019. The business’s taxable turnover exceeds the VAT registration threshold and, therefore, the business will need to comply with MTD rules for the period starting 1 June 2019.
Business with a taxable turnover above the MTD threshold at the point they need to register for VAT
A business that is not registered for VAT is required to register from September 2019, because the taxable turnover over the previous 12 months has exceeded the VAT registration threshold. The business must follow the rules for all VAT returns it is subsequently required to make, as its taxable turnover was above the VAT threshold when it was required to register.
VAT-registered business with a taxable turnover below the MTD threshold until November 2019
A business is registered for VAT, but its taxable turnover is below the VAT registration threshold until November 2019. The business must follow the rules for any VAT period that starts on or after 1 December 2019, as its taxable turnover now exceeds the VAT registration threshold.
MTD is mandatory for almost all VAT-registered businesses from 1 April 2019. However, HMRC has made an exception for a small minority of VAT-registered businesses with more complex requirements, including trusts, not-for-profit organisations that are not set up as a company, VAT divisions, VAT groups, and those required to make payments on account. These businesses have until 1 October to comply, giving them an extra six months to prepare.
HMRC has allowed certain permanent exemptions to the MTD rules, such as where it is not reasonably practicable for someone to use digital tools to keep business records or submit returns, for reasons of age, disability, remoteness of location, or for any other reason. Those subject to an insolvency procedure are also exempt.
If you are exempt from MTD, or have a taxable turnover below the VAT threshold, you may still choose to follow the MTD rules.To do this, you must tell HMRC before the start of the next VAT period that you want to use the service, and also the date that your next VAT period begins. You will then be subject to the MTD rules from the start of that next VAT period.
If, at a later date, you want to leave the MTD initiative, you must inform HMRC in writing. Compliance is mandatory for those businesses or individuals without an exemption.
Under MTD regulations, you will no longer be allowed to keep manual VAT records only, nor can you manually input your VAT return when filing with HMRC. Instead, you must keep digital records of sales and purchases for VAT, using compatible software that enables you to send updates and submit returns to HMRC throughout the year.
For software to be considered compatible by HMRC, it must be able to:
• Record and preserve digital records
• Provide to HMRC information and returns from data held in those digital records using an application programming interface (API) which provides a secure link between the software and the HMRC platform
• Receive information from HMRC via the API.
Some compatible software may be able to carry out all these functions, while others may need to be used alongside other programs. If you use spreadsheets to keep business records, you’ll also need MTD-compatible software so that you can send HMRC your VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD-compatible.
A key aspect of the MTD initiative is to ensure that, once a digital record is created, any further transfer of that data must be done digitally, via linked software. Transferring data manually (ie, re-typing, or copy and pasting information from one place to another) will not be allowed. Instead, the transfer of information should be done electronically.
A digital link can include linked cells in spreadsheets where, for example, a formula in one sheet mirrors the source’s value in another cell.
HMRC will also accept digital links such as:
• Emailing a spreadsheet containing digital records to a tax agent, so the agent can import the data into their software
• Transferring a set of digital records on to a portable device, such as a USB drive, and giving this to an agent to import the data
• XML, CSV import and export, and the download and upload of files
• Automated data transfer
• API transfer.
To help make the switch to MTD easier, HMRC is allowing a ‘soft landing period’ for businesses to have these digital links in place. Until 31 March 2020, where a digital link has not been established between software programs, HMRC will accept the use of ‘cut and paste’.
HMRC is working with software suppliers to ensure that suitable software is available. More than 150 software packages are currently recognised by HMRC and more products are being developed. You can find a full list of MTD-compatible software at: www.gov.uk/guidance/software-for-sending-income-tax-updates#VAT