1 April 2021 is a notable date for your diary, as from this date VAT-registered businesses with a taxable turnover above the £85,000 VAT threshold will be required to follow the Making Tax Digital (MTD) rules. These rules mean that you must keep digital records using ‘functional compatible software’ for your VAT returns. If you are a business that is below the VAT threshold you can voluntarily also join the Making Tax Digital service.
If you are one of the over one million UK VAT registered businesses facing the new MTD obligations then the rules are not to be overlooked as these are backed by the threat of penalties by HMRC!
What are the new rules?
Let’s start by looking at what the new rules are for MTD. In essence businesses must keep and maintain relevant VAT records digitally within ‘a functional compatible software’ package, which we will come onto to later. This will allow you to keep digital records and submit VAT Returns using this software, or via the use of ‘bridging software’ to connect non-compatible software (like spreadsheets), to HMRC systems.
The new MTD rules require the mandatory digital record keeping of all VAT reporting periods beginning on, or after 1st of April 2021. The requirements apply to the first complete VAT return from or after this date (the first return starting on or after April 2022).
Records to be included are of sales and purchase invoices with VAT, accounting records not specific to VAT return requirements are not included.
What data needs storing?
The data that must be stored digitally according to the HMRC is:
- your business name, address and VAT registration number
- any VAT accounting schemes you use
- the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
- the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
- any adjustments you make to a return
- the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything you buy and sell
- the rate of VAT charged on goods and services you supply
- reverse charge transactions - where you record the VAT on both the sale price and the purchase price of goods and services you buy
- your total daily gross takings if you use a retail scheme
- items you can reclaim VAT on if you use the Flat Rate Scheme
- your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme
What is meant by ‘functional compatible software’?
The MTD rules mean that your relevant VAT records must be kept and maintained digitally within ‘a functional compatible software’. So, what is meant by a ‘functional compatible software’ program?
It is essentially a software program, or set of software programs, products and applications which are used to hold your financial records. This could be one or multiple Excel spreadsheets, or the use of bookkeeping software which may also have a number of add-on applications.
However, you need to consider how you will submit your VAT Returns using your choice of software system to the HMRC system. There are numerous options available such as Sage 50 Accounts MTD Add-On, Xero and QuickBooks. You could also use ‘bridging software’ to connect non-compatible software (like spreadsheets) to the HMRC system.
HMRC are very clear that where a business uses more than one piece of software, or multiple Excel sheets, all software or Excel sheets must be digitally linked. This means no more copying and pasting within spreadsheets or manually entering figures taken from one document/sheet onto another.
If a business uses more than one software package to keep records and submit returns, these packages need to be linked digitally. Some of the ways HMRC suggest these can be linked include:
- using formulas to link cells in spreadsheets
- emailing records
- putting records on a portable device to give to your agent
- importing and exporting XML and CSV files
- downloading and uploading files.
There are some exceptions in the uninterrupted digital journey. HMRC has granted an exemption on manual calculations on special VAT schemes including the capital goods scheme, flat rate, Daily Gross Takings or partial exemptions.
The digital links between the software packages used need to be in place before the business’s first VAT period after the 1st of April 2021.
Now’s the time to make your tax digital if you want to avoid facing penalties from HMRC. Ensure that you;
- check if you meet the VAT threshold and the MTD rules apply
- review or invest in functional compatible software
- check that your software is compatible with the HMRC system to enable you to submit your VAT return
- ensure everything is in place before the deadline.