Making Tax Digital: Thoughts for VAT Registered Businesses

The first two blogs in our Making Tax Digital series provided first, an overview of the scheme and second, a look at the differing impact of MTD on businesses and individuals. We suggested areas to look at and tips to get started for businesses in general, but there is one group that requires a post specific to them, those businesses and individuals that are registered to pay VAT.

As a result of the many consultations on Making Tax Digital, it was announced in the Spring Budget 2017 that only these companies and individuals would be required to keep digital records with compatible software and use these to create their digital return for periods starting from 1st April 2019. While this is almost a year away, it does mean that if you or your business has a turnover over the current VAT threshold of £85,000, it’s time to start keeping digital records. 

If you’re wondering just how to define a digital record, it simply means that manual records are no longer acceptable and instead, all of your tax information needs to be kept in ‘functional compatible software’ which is able to connect to HMRC, usually through an API, or Application Programming Interface. This could be software, a spreadsheet or a combination of both and your VAT return will now be submitted to HMRC through this software, as opposed to entering figures into the HMRC portal.

The software that your business chooses will be key, and should be able to perform the following functions: 

  • Keep the necessary records in digital form and retain these for six years
  • Use the digital records to create a VAT return and submit this return to HMRC
  • Provide HMRC with additional data on a voluntary basis
  • Receive compliance information from HMRC

HMRC is due to publish information on software providers that meet these criteria, including having the necessary API in place, but moving your business’s records from manual to digital format can be a daunting prospect, and we would advise that you speak to your tax agent on how to plan this move. Fortunately, the case has been made for a ‘soft landing’ period, a twelve month extension to March 2020 which will allow businesses additional time to implement digital links and we anticipate that the input of data manually will be acceptable. 

In addition, your software will need to capture more data to that which has previously been required.  Prior to the introduction of Making Tax Digital, it was enough for businesses to keep records of sales and purchases along with a separate summary of VAT and if required, to issue VAT invoices. As of April 2019, for supplies given, businesses will need to record any different rates of VAT, along with the amount chargeable at those rates. For supplies received, you will need to record the amount of input tax to claim along with capturing the proportions of VAT exclusive value of outputs, split across varying VAT liabilities. 

There are, however, exemptions in place and these consist of a) any organisations or individuals voluntarily paying VAT while trading under the threshold, b) those that do not use electronic communications due to religious reasons, c) those that are subject to an insolvency procedure and d) those that it is not practicable for, e.g. they may live in a remote location, have a particular disability or their age precludes submitting in this manner. If you or your business do not fall under this exemption, then regardless of your business activities, if your turnover exceeds the VAT threshold then you must submit a digital tax return using compatible software.

We hope that you found this post useful. If you’d like any further advice on this matter then please just get in touch with us at email@smithbutler.co.uk