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Kirk Rice Blog

Making Tax Digital for VAT (MTDfV) – A GuideWritten on November 22, 2018 by Kirk Rice LLP

The first stage of HMRC's Making Tax Digital (MTD) programme focuses on VAT, and imposes new requirements for digital recording keeping on VAT registered businesses and organisations from April 2019. Read on to find out whether Making Tax Digital for VAT (MTDfV) will affect your business.

From April 2019 all VAT registered businesses and organisations with taxable turnover above the VAT threshold of £85,000 will be required to:

  • Maintain their accounting records digitally in a software product or spreadsheet. Maintaining paper records will cease to meet the legal requirements in tax legislation.
  • Submit their VAT returns to HMRC using a functional compatible software product that can access HMRC’s API (Application Program Interfaces) platform.

Businesses within scope will need to acquire a suitable software product or appoint an accountant to submit returns to HMRC on their behalf.

HMRC’s online VAT return will remain available only to businesses that are voluntarily registered for VAT (ie, businesses that complete a VAT return but have taxable turnover below the VAT threshold).

Will this affect me?

The MTDfV requirements will apply to all VAT registered businesses and organisations with 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. VAT registered businesses with turnover below the VAT threshold can opt in to MTD, and file their VAT returns using MTD compatible software, but there is no obligation to do so.

There is a 6 month deferral period until October 2019 for some of the more complex business, including VAT groups and trusts, and we are able to advise on which businesses meet the deferral criteria.

How to calculate your taxable turnover:

When working out taxable turnover you should include standard rated, reduced rated and zero-rated supplies; and exclude outside the scope and exempt supplies.

The relevant period to be considered when determining whether the MTDfV requirements apply, is the same rolling 12 months that applies when considering whether a business must compulsorily register for VAT, but there is no rule that looks forward. When MTDfV starts, you consider the 12 months to the businesses’ potential start date for MTDfV when deciding whether the requirements apply.

Even if you do not meet the qualifying turnover initially, you will need to continue to monitor their turnover to establish when you need to start complying with the MTDfV requirements.

Once your business is required to comply with the MTDfV requirements, the obligations continue, even if the turnover of the business subsequently drops below the VAT threshold.

Eventually, MTDfV may be extended to all VAT registered businesses, but this will not happen before April 2020.

When does MTDfV start?

Businesses and organisations within scope, will have to keep digital records, and submit VAT returns using functional compatible software from the start of their first VAT return period beginning on or after 1 April 2019, or 1 October 2019 if they are covered by the 6-month deferral mentioned above. Annual accounting and special VAT accounting periods will continue to be available.

Are exemptions available?

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 another reason).

Existing exemptions from online filing for VAT are expected to be carried over automatically to MTDfV. Those that are not currently exempt from VAT online filing may find it difficult to persuade HMRC that the exemption should apply.

What do you mean by software?

HMRC is working closely with software providers to ensure a range of suitable products will be available at a variety of price points, however, we believe it is unlikely that a free software product with MTDfV functionality will become available.

Digital records can be maintained in more than one program or software product. In a change to the original announcements, the use of spreadsheets, either to record individual transactions or as part of a suite of software and spreadsheets is now permitted. However, the spreadsheet will need to be either API enabled or used in combination with an MTD compatible software product so that data can be sent to and received from HMRC systems; an existing spreadsheet alone is not a free way to comply with the MTDfV requirements.

MTDfV functional compatible software must be able to:

  • Keep records in a digital form
  • Preserve records in a digital form
  • Create a VAT return 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

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. Businesses 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 encourages records to be kept in 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.

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The regulations require the following records to be kept digitally:

Designatory data:

  • 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 the 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 (eg, 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, zero rate, exempt and outside the scope outputs. There is a relaxation for mixed rate supplies at a single inclusive price (eg, 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.

VAT account:

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 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.

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 deregistration, but may be kept in alternative formats rather than in functional compatible software.

Digital record keeping requirements in particular situations

As explained in the previous section, the MTD regulations generally require a digital record of each and every transaction. There are exceptions for:

Retail schemes

Retailers will be able to record gross daily takings (not weekly, monthly or quarterly) rather than each individual transaction. This means that there does not need to be a digital link between tills and the accounting records; recording the daily totals in the digital accounting records meets the requirements. Many businesses are using a retail scheme without understanding that they are doing so.

Flat rate schemes

The flat rate scheme will continue and digital records of supplies received will not be required (unless they relate to capital items which cost more than £2,000 including VAT).

Margin schemes

The additional records required for margin schemes and the calculation of the marginal VAT charged do not need to be kept in digital form. These records must still be maintained in some format.

Records maintained by third parties

The regulations allow HMRC to relax the digital record keeping requirements where it would be impossible, impractical or unduly onerous to comply.

HMRC is using this power to allow supplies made by third parties to fall outside the digital record keeping requirements until the point at which the agent supplies the information. This allows a summary received from an agent to be treated as a single invoice to create the digital record. The example given is that of a letting agent. This relaxation does not apply to employees or others such as charity volunteers who are not third party agents. HMRC is expected to issue further guidance to relax the requirements for supplies made in connection with activities run by charity volunteers.

There is a similar relaxation for supplies received by third-party agents and for employee expenses.

How can Kirk Rice assist?

We can support your business through the transition period, offering assistance with the following:

  • Advice on how to remain compliant and avoid possible non compliance penalties
  • Advice on changes in record keeping and transition to bookkeeping software, including software selection, set up and training
  • Assistance in filing your returns, if you wish to keep using your current spreadsheets we can use our compliant software to upload the relevant data to HMRC.
    If you have any question on the above or to discuss how we may assist, please contact us directly.

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Any reader interested in discussing Making Tax Digital for VAT, can telephone Graham Jennings on 01344 875 000 in our Ascot office, Tim Neale on 01252 960 500 in our Fleet office or James Moody on 020 8789 8588 in our Putney office. You can also email info@kirkrice.co.uk.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

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