Making Tax Digital – Your Questions Answered
MTD represents one of the biggest changes to reporting requirements for (initially) VAT registered businesses. It is important to be clear about what is required after April 2019 and who will be included and excluded from the changes.
It is important to understand which records need to be kept in a digital format and also the figures to record.What is the starting date for MTD?
We have previously given a timeline (see here), but MTD takes effect for VAT periods beginning on or after 1 April 2019 for most VAT registered businesses. The new regulations must be met for any VAT periods commencing on or after 1 April 2019.
However, a small number (about 3%) of the VAT registered entities with more complex VAT affairs will not join until periods beginning on or after 1 October 2019. This list includes trusts, VAT groups or divisions, payment on account businesses and those that use the annual accounting scheme.Do all VAT registered businesses join MTD?
A business that is voluntarily registered does not need to join MTD (i.e. those with taxable sales of less than £85,000 per annum). Income that is either exempt from VAT or outside the scope is excluded from the calculations. However, voluntary registrations must monitor their taxable sales on a rolling basis after April 2019 and if they exceed £85,000 at any time, they must join MTD from the beginning of their next VAT period.What if my turnover drops? Can I leave MTD?
In short, no!
If a business has to join MTD, even due to a temporary boost to taxable sales which takes it over the £85,000 limit, it cannot leave again even if sales fall below £85,000. 'Once you're in, you're in for good.' You can only leave MTD if you deregister.Does HMRC have a favoured way of keeping its digital records?
No – it is up to business owners to decide the format of their digital record keeping. Should spreadsheets be used, one thing to bear in mind is that bridging software (which MoynanSmith has) will be needed to link the spreadsheet totals to the VAT return submission process.
The aim of MTD is for minimal human input in the whole accounting process, which HMRC (controversially) thinks will reduce VAT errors made by a business and ultimately increase the tax yield.What records will need to be kept in a digital format?
There is no need for a retailer (e.g. a coffee shop) to digitally record every sale that is made to a customer but it must record its daily gross takings figures in a digital format.
Handwritten invoices continue to be okay to raise, but each invoice must be digitally recorded. Purchase invoices must also be recorded digitally unless a business uses the flat rate scheme (FRS). FRS users only need to digitally record purchase invoices where input tax is being claimed, i.e. spending on capital goods costing more than £2,000 including VAT.
Many businesses make VAT adjustments e.g. for partial exemption, second hand car scheme, or the capital goods scheme. These adjustments can be calculated using any method and then must be entered into the digital system by way of a journal.What information from sales and purchase invoices needs to be recorded digitally?Purchase invoices
You must record the total value of the invoice excluding VAT (i.e. net amount) and the input tax being claimed. There is no need to digitally record transactions that are excluded from the VAT return, e.g. wages paid to employees.
Example: Jamie is VAT registered and buys a book for £100 (zero-rated) and some business stationery for £120 plus VAT on the same invoice. He must digitally record the net total figure of £220 and the input tax being claimed, i.e. £24.Sales invoices
The net figures subject to different rates of VAT must be recorded as well as the rate of VAT being charged.
Example: A supplier raises an invoice to a restaurant for zero-rated food (£500) and standard rated alcohol (£600 plus VAT). The wholesaler will digitally record the net figures of £500 and £600 and the VAT rates that applies to these amounts, i.e. 0% and 20%.
The processing date of the invoice will be the invoice date, unless the business has adopted the cash accounting scheme.Can you enter a statement amount, or does each separate invoice need entered?
Unfortunately, each separate sales or purchase invoice must be recorded in a digital format. You are not able to batch invoices together and make one entry based on a payment or statement total.Must all purchase invoices and receipts be recorded digitally? What about small amounts like fuel receipts on an employee expense claim?
There is a potential escape clause in the regulations that a transaction does not need to be recorded digitally if this would be 'impossible, impractical or unduly onerous.' HMRC has confirmed this would apply to employee expenses (in VAT notice 700/22, para 3.3.3)Will the way I submit VAT returns change?
Voluntary registrations may continue to use the Government Gateway but businesses involved with MTD will have to submit their returns through HMRC's API (Application Programming Interface) platform.
An aim of MTD is that the business owner will be able to view the nine boxes of the VAT return displayed on his accounting software and, if he is happy with the figures, will just press the send button to submit the return, i.e. making a digital exchange with HMRC.How can we here at MoynanSmith help?
Some clients will be happy to directly submit their returns to HMRC using their own accounting software.
We can also check the entries on your software to ensure it is correct, before making the submission.
For some businesses, we have already agreed to get all the papers from the client and prepare their records onto some accounting software, ensuring their VAT records are correct, and also starting to put together their accounts as we go through the year.
As mentioned above, we are also able to receive client's information (e.g. spreadsheets) and use our bridging software to ensure the new regulations are met.What if I get things wrong? Will I incur penalties?
HMRC have announced a "soft landing" for penalties, and have stated that there will be no penalties issued until VAT periods beginning after April 2020.
For businesses with more complex VAT affairs which do not join MTD until periods beginning after 1 October 2019, the soft-landing period runs until 30 September 2020.
Note - penalties incurred for non MTD related errors can still be incurred.
If you have any questions in connection with MTD and how it will impact your business, please get in touch with one of our advisers.