Making Tax Digital

Important: for all VAT registered entities

HMRC published the Public Notice regarding Making Tax Digital for VAT (MTD) in July 2018. It was originally envisaged that MTD would come into effect for VAT on 1 April 2019, but in late 2018 HMRC announced that certain entities would only become subject to it from October 2019. It is important that all VAT registered entities are familiar with this.

In addition to the Public Notice, HMRC has also published a Stakeholder Communication Pack and a list of software suppliers who have tested MTD compatible software in HMRC’s test environment. Links to the Notice, the Stakeholder Pack and list of suppliers are set out below. We strongly recommend you read them.

https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat

https://www.gov.uk/government/publications/making-tax-digital-for-business-stakeholder-communications-pack

https://www.gov.uk/government/publications/software-suppliers-supporting-making-tax-digital-for-vat

MTD: who does it apply to? 

All entities which are mandatorily VAT registered will be subject to MTD from their first VAT return starting on or after 1 April 2019 (October 2019 for entities in the deferred categories). Contrary to HMRC’s initial position, this will include charities and other not-for-profit organisations.

This means that for organisations with calendar quarter VAT returns, their first affected return will be for the period ending June 2019, for those whose returns end in April, the first affected return will be for the period ending July, and for those with a return ending in May the first affected return will be for the period ending in August.

For entities on monthly returns the first affected return will be the April return.

Entities which are VAT registered, but who are registered on a voluntary basis ie their taxable turnover is less than £85,000, are not subject to MTD (remember that zero-rated supplies are taxable for this purpose). However, where an entity is above the VAT registration limit and is subject to MTD, but its taxable turnover subsequently drops below the limit, it must remain within MTD unless it deregisters from VAT.

Where there is a group VAT registration and one of the members has taxable turnover above the limit then all of the group is subject to MTD even if some members of it have taxable turnover below the limit.

MTD: what is it?

MTD requires entities which are subject to it to keep certain records in a digital format and submit their returns digitally. Please note this is not the same as submitting returns electronically as is now the case.

The return will be submitted via an Application Programming Interface (API) which takes the return figures automatically from your software, as opposed to you keying in the totals for the nine boxes on your VAT return.

Invoices do not need to be kept in a digital format or be scanned in to your software.

HMRC refer to the software as functional compatible software. This need not be a single programme, but can include a set of software programmes, including spreadsheets which record and preserve digital information, provide to HMRC information and VAT returns from data held in those records by using the API and which can receive information back from HMRC via the API eg confirmation that a return has been submitted.

The key point is that the information must be digitally linked ie once data has been input any further transfer, recapture or modification of that data must be done digitally. It is not possible to take figures from your accounting software and manually key it in. This will include spreadsheets, though for the first year it will be possible to cut and paste information on a spreadsheet and enter it elsewhere.

Further details of what constitute a digital link are set out in the Public Notice at para 3.2.1.

HMRC accept that certain calculations eg business/non-business, partial exemption, Capital Goods Scheme, subscription apportionments etc are often carried out in spreadsheets outside the accounting software. In these circumstances the manual entry of the relevant figures does appear to be acceptable to HMRC [see para 3.2.1.2 of the Notice].

The submission of the return information to HMRC must always be via API, and whilst HMRC state that they expect most returns to be completed via API enable software, it is also possible to use bridging software which takes data from an otherwise non-compliant package and reports it to HMRC’s API.

Alternatively, API enabled spreadsheets can also be used.

MTD methods of submission options

What records must be kept digitally

You must have a digital record of your business name, the address of your principal place of business, your VAT registration number and any VAT accounting scheme which you use.

For each supply that you make you must record the time of supply, the value of the supply (exclusive of VAT) and the rate of VAT charged.

This only includes sales which are included as part of your VAT return. It does not include, for example intra-group supplies within a VAT group, though if you are only keeping some records digitally and not others our view is that this would complicate matters.

Where you need to apportion the output tax due on a mixed rate supply you only record the total value and the total output tax due; not the value of the supplies at each rate.

For purchases - again you record the time of supply, the value of the supply (excluding VAT) and the amount of input tax that you will claim.

This only includes purchases which end up on the VAT return so you would not need to include salaries.

Where, at the point of entry, you do not know how much VAT you will reclaim eg overhead VAT where how much is recoverable is not known until a partial exemption or business/non-business calculation has been performed at the end of the period you can record the total VAT due and make an adjustment for the irrecoverable VAT later.

To support each VAT return that you make the functional compatible software must contain:

  • The total output tax you owe on sales
  • The total tax you owe on acquisitions from other EU Member States
  • The total tax you are required to pay under a reverse charge procedure
  • The total input tax you are entitled to claim on business purchases
  • The total input tax you can claim on acquisitions from other EU Member States
  • The total tax that needs to be paid or you are entitled to reclaim following a correction or error adjustment
  • Any other adjustment allowed or required.

A total of each type of adjustment must be recorded as a separate line, but you do not need to keep the underlying calculations behind the adjustment in your functional compatible software.

Paragraph 7 of the Notice sets out various examples of what has to be kept digitally.

What to do next?

Speak to your software provider as soon as possible to find out what they have done to comply with MTD.

If our experience is anything to go by, it is likely they will try and sell you the latest version of their software, but this may not be needed if there is bridging software and an API enabled spreadsheet to link your current software to HMRC’s API.

We cannot stress the importance of speaking to your supplier as soon as possible given that MTD is due to take place at the same time as BREXIT which will put further stresses on your accounting function.

MTD deferred until October 2019

HMRC announced in Autumn 2018 that entities falling into the following categories will not have to comply with MTD until their first return period commencing on or after 1 October 2019.

  • Trusts
  • Not for profit entities which are not set up as companies
  • VAT group registrations
  • Divisional VAT registrations
  • Certain public sector organisations such as government departments
  • Local Authorities
  • Businesses based overseas
  • Organisations in the Payment on Account regime
  • Organisations in the Annual Accounting Scheme
  • Public corporations