The introduction of Making Tax Digital (MTD) for VAT will require businesses registered for VAT with a taxable turnover above the VAT registration threshold of £85,000 to keep VAT records digitally and file their VAT returns using MTD compatible software. This will start from their first VAT
period starting on or after 1 April 2019.
Businesses with a taxable turnover that has always been below the VAT threshold will not have to operate MTD, even if they are VAT registered, but can still choose to do so voluntarily.
As part of the guidance HMRC are publishing on the introduction of MTD, they have produced a new Public Notice – VAT Notice 700/22: Making Tax Digital for VAT, replacing the Draft VAT Notice 200/21 published at the end of 2017. The Notice is also available on the Gov.uk website.
The new notice gives guidance on the digital record keeping and return requirements for MTD for VAT and provides extensive examples and flowcharts of what will be required from businesses. A number of sections of the Notice now have the force of law. HMRC also say that this notice is not a standalone document and should be read in conjunction with other VAT notices, in particular the following:
- VAT Notice 700: VAT guide;
- VAT Notice 700/21: keeping VAT records;
- VAT Notice 700/1: should I be registered for VAT?
- VAT Notice 700/12: how to fill in and submit your VAT Return;
- VAT Notice 700/45: how to correct VAT errors and make adjustments or claims;
- VAT Notice 718: the Margin Scheme and global accounting;
- VAT Notice 727: retail schemes;
- VAT Notice 733: Flat Rate Scheme for small businesses;
- VAT Notice 700/21: The special accounting scheme for gold transactions;
- VAT Notice 709/5: Tour Operators Margin Scheme for VAT.
There are certain limited exemptions from MTD if HMRC are satisfied that:
- the business is run entirely by practising members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers);
- it is not reasonably practicable to use digital tools to keep the business records or submit returns, for reasons of age, disability, remoteness of location or for any other reason; or
- the business is subject to an insolvency procedure.
Functional Compatible Software
Under Making Tax Digital certain records must be kept digitally within ‘functional compatible software’.
Most business keep their records digitally, the difference under MTD is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT returns using the information contained in those digital records and communicating with HMRC digitally via HMRC’s Application Programming Interface (API) platform.
HMRC say that they expect that there will be software products available that will perform all of the required functions while others will not. For example, a spreadsheet or other software product that is capable of recording and preserving digital records may not be able to send or receive information through the API platform. It can still be a component of functional compatible software if it is used in conjunction with one or more programs that do perform these functions.
For example, a business uses a spreadsheet to record all sales, purchases, and expenses in a digital format. The VAT return is then prepared within the spreadsheet, using formulae already written into the spreadsheet. The VAT return information is then sent via a mandatory digital link to bridging software, which digitally submits the information directly to HMRC.
Data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create what HMRC refer to as ‘the digital journey’.
It follows that transferring data manually within or between different parts of a set of software programs, products or applications that make up functional compatible software is not acceptable under MTD; for example, noting down details from an invoice in one ledger and then using that handwritten information to manually update another part of the business’s functional compatible software system.
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.
Businesses may authorise HMRC to receive data from (and send data to) an agent on their behalf in relation to any MTD service. Once the business has done this, that agent can sign up the business to that service, and use software to create, view, edit and send the data to HMRC. The agent may also keep and maintain digital records on behalf of the business. If a business has previously authorised HMRC to receive its VAT return from an agent they can still do this. Agents will not need to be re-authorised by their clients to act for them in the MTD VAT service where they already have existing authorisation to act for VAT purposes.
Where a third party agent makes supplies on behalf of a business, those supplies do not fall within the digital record keeping requirements until the business receives the information from the agent. Where the information is received as a summary document the business can treat this document as one invoice issued by it for the purpose of creating its digital record.
The Notice also gives guidance to VAT group registrations on what record keeping is acceptable; for example, where each group member’s software calculates the required information needed for their part of the VAT return; each group member’s software then sends this information by a digital link to a spreadsheet which is used to compile the totals for the group and prepare the VAT return for the whole of the group; the return information in the spreadsheet is then sent via a mandatory digital link to bridging software, which submits the VAT return to HMRC via an API.
Together, the separate pieces of software maintain the digital records required by the regulations, prepare the VAT return and submit the return to HMRC.
During the soft landing period between 1 April 2019 and 31 March 2020, HMRC will not require a digital link to exist between each group member’s software and the spreadsheet. However, the links between the pieces of software must be digital from 1 April 2020 for the set of software to be considered functionally compatible software for MTD purposes. While HMRC expect that each group member will operate digital links within the software that it uses, it does not expect the software systems of each group member to be linked to other group members’ software systems for VAT purposes if there is no need for them to transfer box 9 VAT return information between the members.