A fundamental change to the way businesses submit VAT returns will be introduced in just a few weeks’ time. HMRC’s Making Tax Digital (MTD) for VAT rules will be compulsory for most VAT registered businesses from 1 April 2019. If your business is not fully prepared for these very significant changes, urgent action is required now.
What is MTD for VAT?
MTD is a key part of HMRC’s plan to become a world leading digital tax authority. HMRC believe that a digital tax system will improve taxpayer compliance and mean more revenue is collected.
All businesses with taxable turnover above the VAT registration threshold (currently £85,000 per annum) will be required to comply with the MTD rules, subject to some very limited exemptions. Those with turnover below the threshold can opt to use MTD, if they wish.
A business within the scope of MTD must use MTD compatible software to meet the new requirements. The requirements are to:
a) Maintain digital VAT records
Certain VAT information must be kept in a digital format, in order to be MTD compliant. Broadly, this includes:
- Business Details – Name, address, VAT number and VAT accounting schemes used
- Sales – Tax point (time of supply), value and rate of VAT for each supply made
- Purchases – Tax point (time of supply), value and amount of VAT to be claimed for each purchase
- VAT Account – Pulls together all of the VAT records and any adjustments to produce a summary, from which the VAT return is produced
There are a number of special MTD record keeping rules for businesses using VAT accounting schemes (e.g. flat rate scheme, margin schemes, retail schemes etc) and businesses making or receiving supplies through third party agents (e.g. landlords using a managing agent).
Where digital records are kept in more than one place, each record must be digitally linked, so that a digital audit trail exists. This means that the manual transfer of information between different VAT records (e.g. ‘cut and paste’ from one spreadsheet to another) will no longer be possible. HMRC will operate a ‘soft landing’ period until 31 March 2020, during which businesses will not be penalised if digital links are not yet in place. However, where bridging software is used to submit VAT returns (see below), the software must be digitally linked to the digital VAT account, even during the soft landing period.
b) File VAT returns using MTD software
Once MTD becomes compulsory for a business, it must submit its VAT returns to HMRC using approved MTD compatible software. The software will pick up the VAT return figures direct from the digital VAT account and transmit them to HMRC. Only the usual nine VAT return figures will be transmitted to HMRC. It will no longer be possible to submit VAT returns using the existing HMRC portal.
Businesses using a software accounting package should confirm with their supplier that it will be MTD compatible and what action needs to be taken to complete any necessary upgrade. We would suggest that the cost of any such upgrade is also confirmed with the supplier, as in some cases this can be significant.
If VAT returns are to be submitted direct from a spreadsheet, approved MTD compatible ‘bridging software’ must be used. There are a number of suppliers offering such software.
When will my business need to be MTD compliant?
Businesses within the scope of MTD will need to comply with the new rules for VAT return periods starting on or after 1 April 2019. For businesses on standard quarterly VAT return periods, the first compulsory MTD VAT return will be for the period 06/19, 07/19 or 08/19, depending on the quarterly cycle. For businesses on monthly VAT returns, it will be the 04/19 period. This means there is very little time to prepare.
The introduction of MTD for certain types of business has been delayed until 1 October 2019, namely:
- VAT group and divisional registrations;
- Businesses based overseas;
- Annual Accounting scheme users;
- Businesses in the Payments on Account (PoA) scheme;
- Not for profit organisations which are not set up as a company; and
- Certain public sector entities, local authorities and public corporations
HMRC has written to businesses falling within the above categories directing them to use the 1 October 2019 implementation date. Unless such a letter has been received from HMRC, the 1 April 2019 implementation date must be used. If you have not received a letter from HMRC, but believe you should have done, you should contact HMRC to confirm the position, as soon as possible.
HMRC launched a limited pilot exercise at the end of 2018, which allows certain types of business to voluntarily start using MTD now. If your business is already MTD compliant, you may wish to consider signing up for the pilot now.
How should my business prepare for Making Tax Digital?
Businesses on the 1 April 2019 implementation date should prepare for MTD as a matter of urgency, if they have not already done so. This is so they can ensure that suitable software and processes are well established and any teething problems addressed, well ahead of 1 April 2019.
The first step will be to ensure that your business is using an accounting package or bridging software which will be MTD compatible. Where multiple software programs are used to record VAT data, such as spreadsheets, best practice is to ensure ‘digital links’ between each piece of software are put in place from the outset, although the soft landing period mentioned above allows some leeway until 31 March 2020.
Once you have your MTD software in place, you will need to ensure that the necessary data is being recorded, in order to comply with the MTD digital record keeping requirements.
How can we help?
Menzies LLP has a great mix of software and VAT expertise to help your business get MTD compliant. We have already helped hundreds of clients move their accounting records online, apply best practice processes and controls and take advantage of the associated efficiencies and technologies.
MTD for VAT provides yet another compelling reason to review your business’ record-keeping and ‘future-proof’ your systems. Through tailored guidance and training, we can provide bespoke support to help you turn digital. We have already seen these benefits become reality for hundreds of clients that have moved their records on to a digital platform.
To ensure you are MTD ready before the deadline or for more information on the power of the cloud for your business, contact our MTD team.