In early 2017, the government announced that the first businesses to enter the new Making Tax Digital (MTD) regime would be those operating above the VAT-registration threshold. We now have more details about what those businesses will have to do, and when.
We are expecting detailed rules outlining compliance to be in place by April 2018, with a view to a start date of 1 April 2019. HMRC and the software houses have much work to do within that time frame to ensure a smooth start to the scheme.
Digital accounting records
From the start date of 1 April 2019, businesses over the VAT threshold (currently £85,000) will be required to keep digital records of all business transactions. They will also be obliged to use software that is compatible with MTD functionality to provide the information for their VAT returns to HMRC. The digital records must be kept for a period of six years.
Compatible software will be able to connect to HMRC via an Application Programming Interface, creating VAT returns and supplying HMRC with information digitally. HMRC intend to gather data on a voluntary basis as well, to monitor compliance, and also to provide information from their end. The accounting software will therefore also need functionality to manage this two-way flow of information.
Providing information to HMRC quarterly is one of the cornerstones of Making Tax Digital. Although VAT-registered businesses already supply VAT information every quarter, it is not always supplied digitally. HMRC may be underestimating the changes required for the many businesses who use spreadsheets to submit returns.
According to HMRC, the VAT account will link the underlying records and VAT return. This could pose problems where a business uses more than one software system, or spreadsheets. Businesses using spreadsheets will require add-on submission software.
Certain types of businesses will not have to keep digital records. These exceptions are broadly in line with the current rules for electronic VAT returns. Members of religious societies, insolvent businesses, and those who ‘for reasons of disability, age, remoteness of location, or any other reason’ can not, will be exempt. There is a right of appeal if HMRC refuse exemption.
All businesses will have to keep and preserve their ‘designatory data’ digitally. This includes the business name, principal place of business, VAT registration number, details of any VAT scheme used, the VAT account, and information about supplies made and received.
Accounting schemes and returns
HMRC say, “The information contained with the VAT return will be generated by pulling information from the digital records. This information will contain as a minimum the nine boxes required for the VAT return, but can also contain a specific data set of supplementary information – all of which will be pulled from the digital records.” The procedure to correct errors will mostly be as at present.
Any business that currently submits monthly returns or non-standard returns will continue to do so. Likewise, users of the annual accounting scheme can continue to do so. In both cases, the requirement for digital records and returns will still apply.
Retail scheme users will not have to record details of each sale transaction electronically. Rather, they will be allowed to record sales data based on daily gross takings. For those using the Flat Rate Scheme, the requirement for digital record keeping will ‘mirror’ current requirements.
It will also be possible to submit VAT information more often than the VAT return cycle requires, for example to inform HMRC of a change in circumstances. Long term, HMRC are working towards a scenario where income tax updates are also made quarterly and digitally.
Monitoring your VAT position
As we get closer to the rollout of the MTD VAT regime, it is more important than ever to keep track of business turnover. A business operating over the VAT threshold will enter a more complex regime. It is also a good time to take stock of your accounting systems and assess their fitness for Making Tax Digital. If you would like any advice on VAT or moving your record keeping to a cloud accounting system, please get in touch. Contact one of our offices or enquire online.