As we reported recently, online VAT reporting will be introduced within the government’s new Making Tax Digital system from 1 April 2019. This affects all businesses with a turnover above the £85,000 VAT registration threshold.
HMRC have now published their detailed guidance on exactly what business owners should expect as part of these changes and how they need to adapt their existing processes.
All businesses must keep and preserve their accounting records either for VAT purposes or for other tax purposes. With the introduction of MTD, VAT registered businesses trading above the VAT registration threshold will need to retain certain records within functional compatible software. If you deregister from VAT you will no longer need to keep digital records in functional compatible software, but you must retain your VAT records for the required period of four years.
Five key things you should be aware of
The requirements issued are wide reaching and too numerous to include in full, but here are some of the most important elements to be aware of:
- Depth of digital information that is required to be held
All businesses must have a digital record of their:
- business name;
- the address of your principal place of business;
- VAT registration number; and
- any VAT accounting schemes in use.
In addition, for each supply (i.e. a sale) that a business makes, the following information must be recorded:
- time of supply (tax point) – typically when a VAT invoice is sent or for cash accounting, when payment is received;
- value of the supply (net value excluding VAT)
- rate of VAT charged.
Where more than one supply is recorded on an invoice and those supplies are within the same VAT period and are charged at the same rate of VAT, they can be recorded as a single entry. For example, if 10 standard rated items are sold with 15 zero rated items on a single invoice, it is only necessary to record total figures for each of the VAT rates.
- How will the new VAT record keeping requirements work in practice?
The following examples illustrates how business owners should record transactions in the future:
Example 1
A business receives an invoice and types selected data contained in the invoice into functional compatible software. Even though they have logged the invoice, they must still keep the invoice in its original form as the data in the functional compatible software is not a copy of the invoice.
Example 2
If the business has functional compatible software that scans the invoices received and puts the information in its ledger. If the image is retained and contains all the detail required for VAT purposes then the business does not need to keep the original invoice unless it is required for another purpose.
- What counts as ‘functional compatible software’ for HMRC?
Functional compatible software in this instance is a software program, or set of software programs, products or applications, that must be able to:
- record and preserve digital records;
- provide to HMRC information and returns from data held in those digital records by using the API platform; and
- receive information from HMRC via the API platform.
We have covered this in more detail in our earlier blog on the subject: link
In some cases, software programs will not be able to perform all of these functions by themselves. For example, a spreadsheet capable of recording and preserving digital records may not be able to perform the other two functions listed above, but can still be a component of functional compatible software if it is used in conjunction with one or more programs that do perform those functions. Importantly, the complete set of digital records to meet Making Tax Digital requirements do not all have to be held in one place or in one program and can be kept in a range of compatible digital formats. Taken together, these form the digital records for the VAT registered entity.
- What happens if multiple software systems are used?
Where multiple software systems are used, they need to be digitally linked together and detailed guidance has also been issued about what this means. HMRC have clarified that “a digital link is an electronic or digital transfer or exchange of data between software programs, products or applications”. Using a cut (or copy) and paste function will not qualify.
Examples of acceptable digital links include:
- linked cells in spreadsheets, e.g. a formula in one spreadsheet that mirrors the source’s value in another cell, then those cells are linked;
- emailing a spreadsheet containing digital records to an agent, so the agent can continue to work on the figures to use to file the VAT return;
- transferring records onto a USB memory stick and passing it to the agent; and
- XML, CSV import and export, and download and upload of files.
- When do I need to be compliant by?
Although these new regulations become effective from 1 April 2019, HMRC will allow a period of time (‘the soft landing period’) for businesses to have in place digital links between all parts of their functional compatible software.
For the first year of mandation (VAT periods commencing between 1 April 2019 and 31 March 2020) businesses will not be required to have digital links between software programs. The one exception to this is where data is transferred, following preparation of the information required for the VAT Return, to another product (for example, a bridging product) that is API-enabled solely for the purpose of submitting the 9 Box VAT Return data to HMRC. The transfer of data to this product must be digital.
For the first year of mandation (VAT periods commencing between 1 April 2019 and 31 March 2020), where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.
Need more information?
For further information, visit: https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat
If you have any concerns about these changes or want to discuss any other aspect of VAT compliance please contact Simon Paterson at partners@rjp.co.uk.