The Making Tax Digital (MTD) reforms represent a fundamental and unprecedented change to the UK tax system, which will ultimately impact all UK tax payers.
MTD has been delayed for all other taxes until at least 2020 but it is a requirement for all VAT-registered businesses with a turnover above £85,000 per annum to submit their VAT returns digitally, using MTD-compatible software, from April 2019.
MTD means that VAT registered businesses with turnover over the £85,000 threshold will need to submit their VAT returns digitally using MTD-compatible software. However, MTD also means businesses will need to keep their records in a digital format which enables information to be provided to HMRC directly from their accounting system or via bridging software, through application programme interfaces (APIs) which can also receive information from HMRC.
If you are a VAT-registered business with turnover of the £85,000 threshold you will need to keep digital records. If you keep your records on a spreadsheet you will need to have digital links, through MTD-compatible software, from the spreadsheet to HMRC. If you use an accounting package but prepare your VAT return using a spreadsheet, from April 2019 the accounting package and the spreadsheet will need to be linked digitally.
Many accounting software package providers will provide the application programming interface (API) links and there will also be third-party bridging software solutions. However, you will still need to keep digital records of the underlying transactions.
Under MTD, digital records of all sales will have to be kept, broken down by VAT liability (ie, the value of standard-rated, zero-rated, exempt and outside-the-scope supplies). As of now, only a total of all sales is required for the VAT return. It is also necessary to retain other information, such as all adjustments for business entertainment, car leasing and reverse charges on imported services, and summarise purchases broken down by VAT liability.
For VAT returns submitted on or after 1 April 2019, you will be required to submit the information which completes the existing nine boxes on the VAT return digitally using MTD-compatible software. However, you can also choose to voluntarily submit supplementary data on a periodic basis, such as in relation to the total adjustments made or total supplies made at different VAT liabilities.
HMRC has stated that when deciding whether to carry out a VAT inspection on a business, it will take into account whether the business has provided supplementary data, there are no queries, HMRC is less likely to carry out a VAT inspection.
HMRC has confirmed that there will be a ‘soft landing’ period between April 2019 and March 2020, when there will be no financial penalties for record-keeping failures. However, there must be a digital link between your accounting records and HMRC from the outset on 1 April 2019.
