What is Making Tax Digital and how will it affect my business?
If your company is registered for VAT, then you will need to keep on top of the responsibilities. One such responsibility is keeping on top of changes. One of the changes coming into force in April 2019 is the way in which your company keeps tax records, communicates with HMRC and prepares any VAT Returns.
What is VAT and should my company pay it?
In simple terms, VAT is a general consumption tax which is assessed on the value added to goods and services. It applies to most goods and services that are bought and sold in the UK.
Your business is legally obligated to register for VAT with HMRC if the taxable turnover is more than £85,000 in any 12-month period, or if you know it will exceed this threshold. If you are below this threshold you can still voluntarily register for VAT.
For more information about VAT, check out our previous post: VAT - What it is and how do I register?.
Making Tax Digital (MTD) for VAT
MTD is a new government service designed to streamline the HMRC processes and make paying tax quicker, easier and more efficient for companies doing business within the UK.
MTD will apply to all VAT registered businesses whose taxable turnover is above the VAT registration threshold. If the turnover of your business is below £85,000 then you are not required to follow the new rules, although you can opt in to comply voluntarily.
What are the changes coming in?
Most of the changes coming in relate to the software you are using in order to carry out your VAT Return. At the moment, you may be using an online service in order to store and update you records, this is fine. However, under the new rules, the software you are using will need to be able to communicate with HMRC's Application Programming Interface (API) platform and uphold new security standards.
This new, higher standard comes into force for VAT Return periods beginning 1st April 2019, which means you need to make sure any software you are using is compliant by that date.
Are there any exemptions?
There are several exemptions that can be taken into account when MTD comes into force. Your business will not need to comply if HMRC is satisfied that:
- Your business is run entirely by practicing members of a religious society whose beliefs aren't compatible with the regulations. An example could be if the religion prevents the use of a computer.
- It is unreasonable or impractical for you to be expected to use digital recordkeeping tools.
- This can be based on age, disability or the remoteness of your location.
- Your business is subject to insolvency.
Apart from these exemptions, if your business is liable for VAT, you should comply with the MTD rules.
So are there any other changes that have to be taken into account?
Like all things that HMRC changes, there's more to take into account than you may think. Let's take a look at the other changes you will need to take into account.
New digital record-keeping requirements
This goes back to the software you are using in order to report your VAT.
As a VAT registered business, you're already obligated to keep certain records and accounts. These will now have to be kept in a digital format and you must use functional compatible software.
Functional compatible software is a system, software product or application that can record and preserve digital records, provide HMRC with information and returns from the data held in the records.
Your business will not be expected to carry out all of these functions using the same piece of software. For example, you can keep your records in a spreadsheet document, but then save them on an encrypted cloud service and submit them to HMRC using a secure client portal. All that matters is that you are complying with every aspect of the requirement.
The new requirement for digital links
All transfers of data or information between software programs, apps or services must be digital if the information forms part of the company's digital records. After information has been entered into software as part of your records, any new transfer or modification of data needs to be done digitally and those changes need to be linked to demonstrate the digital journey.
This sounds a little complicated, however, all it boils down to is you shouldn't manually transfer data within or between different parts of a set of software programs. An example would be, writing down details from one invoice, and then using the same handwritten notes to manually update a different piece of software that forms part of your company's functional software system.
Examples of a digital link can include:
- Emailing a spreadsheet with digital records to a tax agent so they can import the data into their own software
- Transferring a data set onto a portable device and giving that device to a tax agent
- An XML or CSV import
- An automated data transfer
- An API transfer
Note: Simply cutting and pasting the data does not count as a digital link.
Once information has been made digital, it needs to stay that way
This is why digital links are going to be such an important record-keeping tool for your business.
HMRC has said it will allow for a soft landing period' that essentially acts as a grace period in which your business will be forgiven for not having fully implemented the changes.
During the first year of implementation, HMRC will allow for the use of cut and paste' as a digital link for the grace period.
Rules on submitting VAT information to HMRC
As previously mentioned, your company must always and only submit information to HMRC via an API. Don't worry about this too much as it's likely that your commercial accounting or record-keeping software already comes VAT-enabled - but if not HMRC has said that it's willing to accept a couple of alternatives.
Our sister company, QuickFile, has been recognised by HMRC for being suitable for MTD VAT
The first alternative is bridging software, this is a digital tool that can be used to connect accounting software to HMRC systems.
The second alternative is to use API-enabled spreadsheets - which can either combine with accounting software to submit the necessary VAT information, or can be used to keep digital records and then be submitted to HMRC.
What VAT records need to be kept digitally?
There are several kinds of records and different data types that you will be expected to keep digitally. The first type of information you must keep digitally is designatory data', this includes:
As well as this you will need to keep a digital record of the following information for every supply you make:
- The time of supply
- The value of supply (the net value, not including VAT)
- The rate of VAT that you charge
These requirements only apply to the goods or services you supply that are VAT-liable. If you carry out any supply that is VAT exempt then you don't need to record the information digitally.
The same reporting requirements apply to supplies received, although it is slightly different as you report the amount of tax you are planning to claim.
If more than one supply is included in an invoice, under the new rules you'll be allowed to record the totals from the invoice.
You also need to record certain data about any third-party agent that arranges to supply goods on your behalf. This may not be possible to do on a daily basis, so you are able to record this as a single digital invoice.
Other changes which may affect your business
You must also digitally record summary data as part of each VAT Return you submit to HMRC. This means your software will need to contain digital records of the total tax your company:
- Owes on sales
- Owes on acquisitions from other EU countries
- Needs to pay on behalf of your suppliers under a reverse charge procedure
- Is entitled to claim on business purchases
- Needs to pay or reclaim following a correction or adjustment
You're also expected to record any other adjustment allowed or required by VAT rules, and it is important to note that a total of each adjustment must be recorded as a separate line in your software system.
How will MTD affect accounting schemes?
Several of the accounting schemes will be affected by the new regulations.
VAT retail scheme - you will need to keep a digital record of your Gross Daily Takings (DGT). You're not required to keep a separate record for the supplies that make up your DGT in your functional compatible software.
Flat Rate VAT - the following changes will come into force:
- You won't need to keep a digital record of your business purchases unless they count as capital expenditure goods on which input tax can be claimed.
- You don't need to keep a digital record of the relevant goods used to determine whether your business must apply the limited cost business rate.
If your business uses any scheme other than those mentioned above, you will need to record each supply as either one standard rated supply or one zero rates supply.
Is there anything else I need to know about MTD?
There are a number of updates that haven't been outlined above and these will be covered now.
- Future updates to the system will enable businesses to provide VAT information to HMRC outside of a VAT Return on a voluntary basis.
- A future update will allow companies to submit extra information to support the summary data outlined within their VAT Returns.
- If you have an agent that deals with HMRC on your behalf, you will need to inform HMRC about them. HMRC will then get in touch with your approved agent and give them all the information they need in order to move forward.
- Your agent will be able to keep and maintain digital records on your behalf.
- You can have as many agents as you want to represent your company, they just need to have access to software of their own, or software that has access to your company's records.
These changes may seem a little daunting to begin with, but they are quite straightforward. Most businesses have been moving in more of a digital direction for many years, HMRC are just trying to catch up.
All you need to do is think a bit harder about how you create, share and store digital records. You will also need to make sure that your accounting software is compatible with HMRC's systems.
The information provided is for guidance only and is correct at the time of writing. You should clarify any details with your own accountant or HMRC.
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