What is Making Tax Digital?
Making Tax Digital is a key part of the government's plan to make it easier for individuals and businesses to get their tax right and keep on top of their affairs.HMRC's ambition is to become one of the most digital advanced tax administrations in the world. Making Tax Digital is making fundamental changes to the way the tax system works - transforming tax administration so that it is:
- more effective
- more efficient
- easier for taxpayers to get their tax right
VAT-registered businesses with a taxable turnover above the VAT threshold are required to use the Making Tax Digital service to keep records digitally and use software to submit their VAT returns from 1 April 2019.
VAT timelineApril 2019 Making Tax Digital mandated for all customers (except those that have been deferred). October 2019 Making Tax Digital mandated for customers that have been deferred. The 6-month deferral applies to customers who fall into one of the following categories:
- "not for profit" organisations that are not set up as a company
- VAT divisions
- VAT groups
- those public sector entities required to provide additional information on their VAT return (Government departments, NHS Trust)
- local authorities
- public corporations
- traders based overseas
- those required to make payments on account and annual accounting scheme users
How does MTD for VAT affect my business?VAT-registered businesses with a taxable turnover above the VAT threshold will need to keep and preserve their VAT records digitally and send VAT returns to HMRC using MTD-compatible software (referred to as "functional compatible software" in the VAT Notice). MTD for VAT does not alter deadlines, nor existing VAT filing periods. Most businesses file quarterly, with the rest filing either monthly (typically very small businesses) or weekly (larger businesses). The only difference is that the filing process must now be done digitally, complete with digital record keeping and preservation. You are still required to provide the same nine boxes of information. You are just required to do so digitally. HMRC have said they will request supplementary data in the future but that this will be voluntary. HMRC have not yet confirmed what this data will be.
Digital record keeping requirementsThe requirement to keep digital records does not mean that businesses will have to scan and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer but each individual transaction (not summaries) will need to be recorded and stored digitally. HMRC would like to encourage records to be kept in as near to real time as possible, but it will still be possible to create the digital records at quarterly intervals, using a bookkeeper or other agent if required, provided the information is entered into a digital record keeping system at that stage. The requlations require the following records to be kept digitally: Designatory date:
- The name of the business or organisation.
- The address of the principle place of business.
- The VAT registration number.
- Details of any VAT accounting schemes used. For supplies made:
- The time of supply.
- The value of the supply.
- The rate of VAT charged. For supplies received:
- The time of supply.
- The value of the supply including any VAT that is not claimable by the business.
- The amount of input tax to be claimed.
Digital LinksWhere records are maintained in more than one program or product there must be digital links between each of the software products/spreadsheets. Information cannot be transferred manually between products. Digital links have been defined and the following actions are included:
- emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation);
- transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to an agent to import that data into their software;
- XML, CSV import and export, and download and upload of files;
- automated data transfer;
- API transfer; or
- linked cells within or between spreadsheets. The transfer of information by the use of copy and paste or cut and paste does not meet the requirement for a digital link.
How CounterBooks helps with MTDWe have now completed an interface to the HMRC MTD system that will allow users of the CounterBooks application to upload their VAT returns directly from within the application as per the new requirement and we have been given permission by HMRC to start rolling the functionality out to our users. We hope to see CounterBooks listed with other compatible software on the HMRC website imminently. If you wish to make use of this function in CounterBooks, please let us know as soon as possible so that we can get you set up in the system and check that everything else required is in place too. The date when you must start keeping digital records and submitting your VAT return to HMRC using MTD-compatible software will vary depending on when your VAT period starts. As a reminder, MTD for VAT will become compulsory for your first full VAT return period that starts on or after 1 April 2019. However, the HMRC service is now available for most organisations to register for. This does not require you to be at the beginning of your next accounting period. Once registered, you will be able to view all of your upcoming VAT obligations via CounterBooks and you will be required to submit their return through CounterBooks from your first upcoming obligation onwards. The existing HMRC VAT portal will no longer be available to you once you have registered for MTD. Note: if you pay VAT by Direct Debit, you cannot sign up to MTD in the 7 working days leading up to, or the 5 working days after sending a VAT Return.
MTD VAT Return Limitation for GroupsIf you are a retailer that uses CounterBooks to process the accounts for only part of your business and you use other systems to process the accounts of other parts of your business, and all of that business is covered by a single VAT registration number, you will need to export information from CounterBooks and the other systems that you use into bridging software that will handle the vat return submission in consolidated form. We are now pleased to say that a bridging function is being added to CounterBooks so that you will be able to import VAT data from third party software into CounterBooks where it can be combined with your CounterBooks VAT data and submitted as a single return, as required by HMRC. We plan to have this function live in early April. Please note that, initially at least, we will only be able to import VAT data formatted as per the format of the VAT Accrued export file generated from within CounterBooks. If you do need to import data from other systems to submit with your CounterBooks VAT return, please let us know as soon as possible so that we can validate the file format used and discuss the feasibility of adapting our import process to match additional file formats if required. If this is not done, you may find yourself in the position of not being able to submit your return to HMRC and may be penalised by them for this.
ExemptionsAn excemption for the digital excluded is included in the regulations and mirrors the current exemptions from online filing for VAT. The exemptions cover those that do not use computers for religious reasons and those that are unable to comply because of age, disability (for example if you cannot use a computer, tablet or smartphone for the frequency amount of time it takes to keep digital records for your business) or location (for example if you cannot get internet access at your home or business premises and it’s not reasonable for you to get internet access at another location. Existing exemptions from online filing for VAT will be carried over automatically to MTD for VAT. Those that are not currently exempt from VAT online filing may find it difficult to persuade HMRC that the exemption should apply. Difficult cases will arise, particularly where an individual has some basic digital skills such as being able to send emails, but would not be able to cope with accounting software or a spreadsheet. There is no specific age at which the exemption applies; each case will be taken on its merits. Location covers those who cannot obtain access to broadband because of where they are located. The exemption will not apply to those who could sign up for broadband but have not done so. Businesses in insolvency procedures are exempt from the MTD for VAT requirements. The current paper-based processes are expected to continue, for both pre and post appointment returns. This exemption covers the following situations:
- when a bankruptcy order or winding-up order or award of sequestration is made or an administrator is appointed in relation to that person;
- when that person is put into administrative receivership; when that person, being a corporation, passes a resolution for voluntary winding up;
- when any voluntary arrangement approved in accordance with Part I or VIII of the Insolvency Act 1986, or Part II or Chapter II of Part VIII of the Insolvency (Northern Ireland) Order 1989, comes into force in relation to that person;
- when a deed of arrangement registered in accordance with . . . Chapter I of Part VIII of that Order of 1989 takes effect in relation to that person; or
- when that person's estate becomes vested in any other person as that person's trustee under a trust deed.