VAT — Making Tax Digital

Over the com­ing years, the gov­ern­ment will phase in its land­mark Mak­ing Tax Dig­i­tal (MTD) ini­tia­tive, which will see tax­pay­ers move to a ful­ly dig­i­tal tax sys­tem.

This fact­sheet out­lines some of the key issues for busi­ness­es.

Making Tax Digital for Business

Mak­ing Tax Dig­i­tal for Busi­ness (MTDfB) was intro­duced in the 2015 Spring Bud­get. The government’s ‘Mak­ing Tax Eas­i­er’ doc­u­ment was pub­lished short­ly after, and out­lined plans for the ‘end of the tax return’. It also set out the gov­ern­men­t’s vision to mod­ernise the UK’s tax sys­tem, with dig­i­tal tax accounts set to replace tax returns for ten mil­lion indi­vid­u­als and five mil­lion small busi­ness­es.

Revised timescales

How­ev­er, indus­try experts and those with­in the accoun­tan­cy sec­tor expressed con­cerns over the pro­posed pace and the scale of the intro­duc­tion of MTDfB, and, as a result, the gov­ern­ment amend­ed the timetable for the initiative’s imple­men­ta­tion, to allow busi­ness­es and indi­vid­u­als ‘plen­ty of time to adapt to the changes’.

MTDfB, start­ing with VAT, took effect from 1 April 2019, as sum­marised below.

Making Tax Digital for VAT (MTDfV)

Under the rules, all VAT reg­is­tered busi­ness­es must keep dig­i­tal records for VAT pur­pos­es and pro­vide their VAT return infor­ma­tion to HMRC using MTD func­tion­al com­pat­i­ble soft­ware.

Only a small hand­ful of busi­ness­es are exempt from com­ply­ing with MTD­fV. Please con­tact us if you believe your busi­ness may be exempt. The only auto­mat­ic exemp­tions arise where a busi­ness is already exempt from fil­ing VAT returns online or it is for­mal­ly insol­vent.

HMRC also has dis­cre­tion to grant exemp­tion in very lim­it­ed cir­cum­stances, such as if they are per­suad­ed a busi­ness is unable to use a com­put­er, soft­ware or the inter­net for rea­sons such as dis­abil­i­ty, loca­tion or on reli­gious grounds. Busi­ness­es are able to make an appeal against a HMRC refusal of exemp­tion.

Enrolment

Since April 2022 MTD­fV has been man­dat­ed for all VAT-reg­is­tered busi­ness­es. This means that even vol­un­tar­i­ly reg­is­tered busi­ness­es, trad­ing below the com­pul­so­ry VAT reg­is­tra­tion thresh­old (£90,000 with effect from 1 April 2024), must keep the req­ui­site dig­i­tal records and file dig­i­tal­ly. If this affects you, and you would pre­fer to con­sid­er dereg­is­ter­ing for VAT, we are hap­py to dis­cuss this with you.

Since Feb­ru­ary 2024 HMRC have auto­mat­i­cal­ly enrolled all new VAT reg­is­tra­tions into MTD, unless exemp­tion from MTD has been specif­i­cal­ly request­ed.

Those busi­ness­es that fall with­in the scope of MTD­fV are required to sub­mit their VAT returns using soft­ware com­pat­i­ble with the MTD­fV reg­u­la­tions. Infor­ma­tion will be extract­ed from the dig­i­tal records in order to pop­u­late the VAT return.

The changes intro­duced as part of the MTD­fV project do not affect the statu­to­ry VAT return dead­lines or pay­ment dates, and busi­ness­es that choose to sub­mit VAT returns month­ly or annu­al­ly can con­tin­ue to do so.

Using third party software and keeping digital records

HMRC do not pro­vide MTD­fV soft­ware, and man­u­al record keep­ing is not accept­able. Busi­ness­es must keep spec­i­fied records in ‘func­tion­al com­pat­i­ble soft­ware’, which cal­cu­lates the VAT return and sub­mits it to HMRC via an Appli­ca­tion Pro­gramme Inter­face (API).

HMRC acknowl­edges there are dif­fer­ent ways to do this. How­ev­er, the trans­fer of data to HMRC, from the manda­to­ry dig­i­tal records to the fil­ing of the return, must be entire­ly dig­i­tal. HMRC has pub­lished VAT Notice 700/22: Mak­ing Tax Dig­i­tal for VAT set­ting out require­ments in more detail.

The VAT notice defines func­tion­al com­pat­i­ble soft­ware as a ‘soft­ware pro­gramme or set of com­pat­i­ble soft­ware pro­grammes which can con­nect to HMRC sys­tems via an API’ which must be capa­ble of:

• keep­ing records in dig­i­tal form as spec­i­fied by the MTD­fV rules
• pre­serv­ing dig­i­tal records in dig­i­tal form for up to six years
• cre­at­ing a VAT return from the dig­i­tal records held in com­pat­i­ble soft­ware and sub­mit­ting this data to HMRC dig­i­tal­ly
• pro­vid­ing HMRC with VAT data on a vol­un­tary basis
• receiv­ing infor­ma­tion from HMRC via the API plat­form.

Records to be kept dig­i­tal­ly are spec­i­fied in the VAT Notice. They include ‘des­ig­na­to­ry data’; the VAT account link­ing pri­ma­ry records and VAT return; and infor­ma­tion about sup­plies made and received includ­ing the dif­fer­ent rates of VAT applic­a­ble. For sup­plies received, the amount of input tax to be claimed is also need­ed.

MTD is not com­plete­ly paper-free, and it does not mean busi­ness­es are man­dat­ed to use dig­i­tal invoic­es and receipts. How­ev­er the actu­al record­ing of sup­plies made and received must be dig­i­tal. Where invoic­es and receipts aren’t held dig­i­tal­ly, they should be kept in hard copy as usu­al for VAT pur­pos­es.

Software issues

The dig­i­tal records required for MTD don’t have to be held in one place or one pro­gramme. Busi­ness­es can keep dig­i­tal records in a range of dif­fer­ent com­pat­i­ble dig­i­tal for­mats. The use of spread­sheets is allowed, in com­bi­na­tion with add-on MTD soft­ware.

From 1 April 2021, where dig­i­tal records are kept in more than one pro­gramme, or where add-on pro­grammes are used, all pro­grammes should be linked dig­i­tal­ly. VAT Notice 700/22 defines these dig­i­tal links.

Digital links

A dig­i­tal link is a trans­fer or exchange of dig­i­tal data between soft­ware pro­grammes, prod­ucts or appli­ca­tions. Where a set of soft­ware prod­ucts is used, there must be dig­i­tal links between them, and once data is entered into soft­ware, any fur­ther trans­fer or mod­i­fi­ca­tion must be via dig­i­tal link.

Man­u­al data trans­fer is not allowed under MTD. An exam­ple would be not­ing details from invoic­es in one ledger, then using that hand­writ­ten infor­ma­tion to man­u­al­ly update anoth­er part of the func­tion­al com­pat­i­ble soft­ware. Copy­ing by hand or man­u­al trans­po­si­tion of data between two or more pieces of soft­ware and ‘cut and paste’, or ‘copy and paste’ is not accept­able.

The VAT Notice out­lines accept­able dig­i­tal links, includ­ing:

• linked cells in spread­sheets
• email­ing a spread­sheet with dig­i­tal records to an agent for the agent to import data into soft­ware to make a cal­cu­la­tion, such as a par­tial exemp­tion cal­cu­la­tion
• trans­fer­ring dig­i­tal records onto portable devices (pen dri­ve, mem­o­ry stick) and giv­ing these to an agent
• XML, CSV import and export, down­load and upload of files
• auto­mat­ed data trans­fer
• API trans­fer.

Transition: soft landing penalty period

For VAT return peri­ods begin­ning between 1 April 2019 and 31 March 2020, penal­ties will not be charged if busi­ness­es don’t have dig­i­tal links between soft­ware pro­grammes. This means ‘cut and paste’ will be accept­able while busi­ness­es update their sys­tems. How­ev­er, from 2020, HMRC will penalise non-com­pli­ance.

The trans­fer of VAT return data to bridg­ing soft­ware to make sub­mis­sion to HMRC must always be dig­i­tal, and is exclud­ed from the soft land­ing pro­vi­sions.

Exemptions

Under MTD­fV, only a small hand­ful of busi­ness­es are exempt. Please con­tact us if you believe your busi­ness may be exempt. Busi­ness­es will be able to make a right of appeal against a HMRC refusal of exemp­tion.