Making Tax Digital (MTD) – VAT
How Will It Affect Me?
MTD-VAT will affect all VAT registered businesses and organisations with an annual taxable turnover above the VAT threshold of £85,000. This includes unincorporated businesses, partnerships, companies, LLPs, trusts, non-UK businesses registered for UK VAT and charities.
A six-month deferral will apply to around 40,000 of businesses who fall into one of the following categories:
- ‘Not for profit’ organisations that are not companies (this includes some charities).
- VAT divisions.
- VAT groups (the deferral applies to the group registration only and not to any group companies that are not covered by the group registration).
- Public sector entities that are required to provide additional information alongside their VAT return (such as Government departments and NHS Trusts).
- Local authorities and public corporations.
- Traders based overseas.
- Those required to make payments on account.
- Annual accounting scheme users
These businesses will be mandated to use MTD from October 2019. HMRC has sent an individual letter to each deferred business to advise them that their start date is the beginning of the first VAT accounting period starting on or after 1st October 2019 rather than the 1st of April 2019. These letters include formal legal notification of the deferral of the start date, and any business that wishes the deferral to apply must ensure that they receive the letter and should retain it carefully. A deferred business that does not receive the letter should contact the VAT Helpline.
Who’s Not Affected?
Businesses with a taxable turnover less £85,000 shall not fall under the MTD requirements. However, they will still be able to access the HMRC online VAT return.
Working Out Your Taxable Turnover
When working out taxable turnover, you should:
- Include standard rated, reduced rated and zero-rated supplies.
- Exclude outside the scope and exempt supplies.
The £85,000 threshold for complying with the MTD for VAT requirements also applies to non-established taxable persons (NETPs) even though they are required to register once they have a taxable turnover of £1.
The period to be considered when determining whether taxable income exceeds the £85,000 for MTD for VAT purposes is the year to the end of any month (i.e. a rolling 12 months). When the threshold is exceeded for the first time the business must comply with MTD for VAT from the beginning of its next VAT accounting period.
No Change Required
No changes are required for the following:
- VAT rules other than those relating to record keeping and filing.
- The amount of information submitted to HMRC; the VAT return will contain the same nine boxes that it does currently though the regulations do allow for additional information to be submitted on a voluntary basis.
- The current filing and payment deadlines for VAT.
An exemption for the digitally excluded is included in the regulations and mirrors the current exemptions from online filing for VAT. The exemptions cover those that do not use computers for religious reasons and those that are unable to comply because of age, disability or location (or for any other reason).
Existing exemptions from online filing for VAT will be carried over automatically to MTD for VAT. Those that are not currently exempt from VAT online filing may find it difficult to persuade HMRC that the exemption should apply. Difficult cases will arise, particularly where an individual has some basic digital skills such as being able to send emails, but would not be able to cope with accounting software or a spreadsheet. There is no specific age at which the exemption applies; each case will be taken on its merits. Location covers those who cannot obtain access to broadband because of where they’re located. The exemption will not apply to those who could sign up for broadband but have not done so.
HMRC is expected to issue further guidance on applying for exemption. The current process is to phone the VAT helpline or make a written request, but applications for exemption from MTD for VAT cannot be made until further guidance is published and HMRC’s internal processes are in place.
Businesses in insolvency procedures are exempt from the MTD for VAT requirements. The current paper-based processes are expected to continue for both pre and post appointment returns. This exemption covers the following situations:
- When a bankruptcy order or winding-up order or award of sequestration is made or an administrator is appointed in relation to that person.
- When that person is put into administrative receivership.
- When that person, being a corporation, passes a resolution for voluntary winding up.
- When any voluntary arrangement approved in accordance with Part I or VIII of the Insolvency Act 1986, or Part II or Chapter II of Part VIII of the Insolvency (Northern Ireland) Order 1989, comes into force in relation to that person.
- When a deed of arrangement registered in accordance with Chapter I of Part VIII of that Order of 1989 takes effect in relation to that person.
- When that persons estate becomes vested in any other person as that person’s trustee under a trust deed.
What Do I Need To Do?
Voluntarily registered businesses that have not opted into MTD for VAT will need to continue to monitor their turnover to establish when they need to start complying with the MTD for VAT requirements. Businesses that newly register for VAT (compulsorily) will need to consider how they will comply with the MTD for VAT requirements and will have very limited time in which to comply.
Once a business is required to comply with MTD for VAT requirements, the obligations continue, even if the taxable turnover of the business subsequently drops below the VAT threshold. Eventually, MTD for VAT may be extended to all VAT registered business, but this will not happen before April 2020 at the earliest.
Record Keeping Requirements
Businesses and organisations within the umbrella of MTD will have to keep digital records and submit VAT returns via functional compatible software from the start of their first VAT return period beginning on or after 1st April 2019, or 1st October 2019 if they are covered by the 6 month deferral mentioned previously. Annual accounting and special VAT accounting periods will continue to be available.
These companies will be required to maintain their accounting records digitally in accounting software or spreadsheet. Maintaining paper records will no longer meet the legal requirements in tax legislation. These companies will be required to submit their VAT returns to HMRC using a functional compatible software that can access HMRC’s API (Application Program Interfaces) platform.
These requirements do not apply to businesses below the taxable turnover threshold.
Software and Digital Links
Digital records can be maintained in more than one program or software product. The use of spreadsheets, either to record individual transactions or as part of a suite of software and spreadsheets is permitted. An existing spreadsheet alone is not a free way to comply with the MTD for VAT requirements as it will not have the functionality to file the return. Spreadsheets will need to be either API enabled or, more likely, used in combination with a commercial MTD compatible software product or spreadsheet so that data can be sent to and received from HMRC systems.
Where records are maintained in more than one program or product there must be digital links between each of the software products/spreadsheets. Information cannot be transferred manually between products. Digital links have been defined and the following actions included:
- Emailing a spreadsheet containing digital records to tax a agent so that the agent can import the data into their software to carry out a calculation (for instance, a partial exemption calculation).
- Transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to an agent to import that data into their software.
- XML, CSV import and export, and download and upload of files.
- Automated data transfer.
- API transfer.
- Linked cells within or between spreadsheets. The transfer of information by the use of copy and paste or cut and paste does not meet the requirement for a digital link.
For the first year, HMRC will not enforce the requirement to have digital links in place. This is to allow some more time for links between legacy systems to be made digital. During this period manual transfer of data between different systems is permitted but the final transfer of data into the MTD compliant software product from which the return is filed must be digital.
MTD for VAT functional compatible software must be able to:
- Keep records in a digital form.
- Preserve records in a digital form.
- Create a VAT from the digital records.
- Provide HMRC with VAT returns and voluntary information by using the API (application program interface) platform.
- Receive information from HMRC using the API platform. This will include messages about a requirement to file and confirmation of successful filing and will allow HMRC to send ‘nudge’ messages to the business/agent.
MTD for VAT Pilot
The MTD for VAT pilot started in April 2018 and moved to public beta in October 2018. In January 2019 the pilot was opened up to all businesses that are mandated to comply with MTD for VAT from April 2019 and to VAT group registrations. In February 2019 the pilot was further extended to all businesses except:
- Businesses based overseas (i.e. with no UK fixed establishment).
- Public corporations.
- Local authorities.
- Users of VAT giant services.
The starting point for businesses that wish to sign-up for the pilot, is the HMRC guide on Making Tax Digital for VAT. The starting point for agents is the HMRC guide on Making Tax Digital for VAT as an agent: step by step.
Digital Record Keeping Requirements
The requirement to keep digital records does not mean that businesses will have to scan and store invoices and receipts digitally. Business can continue to keep documents in paper form if they prefer but each individual transaction (not summaries) will need to be recorded and stored digitally. HMRC would like to encourage records to be kept as near to real time as possible, but it will still be possible to create the digital records at quarterly intervals, using a bookkeeper or other agent if required, provided the information is entered into a digital record keeping system at that stage.
The regulations require the following records to be kept digitally:-
- The name of the business or organisation.
- The address of the principle place of business.
- The VAT registration number.
- Details of any VAT accounting schemes used.
For supplies made:
- The time of supply.
- The value of supply.
- The rate of VAT charged.
If multiple supplies subject to the same rate of VAT are made at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.
The corollary applies: if an invoice has supplies at different rates of VAT (e.g. adult’s and children’s shoes) there must be a separate digital record for each rate of VAT charged. You must split the total value of supplies on the invoice and make a separate entry in the digital records for each rate of VAT charged. This is needed to meet the requirement to have a record of outputs value for the period split between standard rate, reduced rate, and zero rates, exempt and outside the scope outputs. There is a relaxation for mixed rate supplies at a single inclusive price (e.g. meal deals).
For supplies received:
- The time of supply.
- The value of the supply including any VAT that is not claimable by the business.
- The amount of input tax to be claimed.
If there is more than one supply on an invoice the business can record the totals from the invoice.
The VAT account is the link – the audit trail – between the business records and the VAT return. The information required to be held in the VAT account must be kept digitally (the regulations refer to this as the “electronic account”), and the information in that electronic account will be used by functional compatible software to calculate and fill in the VAT return.
To show the link between the output tax in the records and the output tax on the return, the business must have a digital record of:
- The output tax it owes on sales.
- The output tax it owes on acquisitions from other EU member states.
- The tax it is required to pay on behalf of its suppliers under the reverse charge procedure.
- The tax that needs to be paid following a correction or error adjustment.
- Any other adjustment required by VAT rules.
To show the link between the input tax in the accounting records and the input tax on the VAT return the business must have a record of:
- The input tax it is entitled to claim from business purchases.
- The input tax allowable on acquisitions from other EU member states.
- The tax that it is entitled to reclaim following a correction or error adjustment.
- Any other necessary adjustment.
Certain records, such as fuel scale charge calculations, partial exemption calculations and capital goods scheme adjustments, are not included in the list of records that must be kept digitally. Such adjustments can be calculated outside the digital records with a journal entry being made for each type of adjustment.
The cash accounting scheme which allows businesses to account for VAT on the basis of payments made and received rather than on invoices continues. Such businesses are, however, still required to record individual supplies made and received and creating digital records from bank statements alone will not satisfy the requirements.
Some software records reverse charge transactions and it is not necessary to have separate entries for the self-supply and purchase. If the software does not record reverse charge transactions it will be necessary to record reverse charge transactions twice, once as a supply made and a second time as a supply received.
Records must be kept for six years (or 10 years if the business uses VATMOSS). Digital records will need to be maintained for six years following de-registration, but may be kept in alternative formats rather than in functional compatible software.
When Does MTD Become Mandatory?
All business with be required to submit tax returns digitally after 1st Apr 2019. However, HMRC has announced a deferral to the start date of 6 months available to some of the more complex businesses. Therefore, deferred businesses will be mandated to use MTD from October 2019.
Businesses that are affected will need to acquire suitable commercial software or appoint an agent to submit returns to HMRC on their behalf.