Making Tax Digital for VAT

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Are you ready for MAKING TAX DIGITAL FOR VAT ?

Making Tax Digital for VAT is part of a governmental initiative that requires businesses store their financial data as well as process and submit their taxes digitally. It affects VAT and income tax. MTD is an acronym for Making Tax Digital which you may come across quite often.

This is not an entirely new approach to keeping accounting records though. Over the past few years, businesses have had to meet new requirements with respect to how their transactions are recorded and how their VAT is produced and submitted.

In this blog I will focus on MTD for VAT and I will answer the burning question: What exactly is MTD for VAT and does it affect your business ?

Admittedly, it can be confusing and hard to understand for business owners exactly what their obligations will be under the new rules. However, the purpose of this governmental initiative is to streamline the process of managing and submitting tax returns, because not only that incorrectly filed taxes cost the government several billion pounds per year, but they cause businesses disruption, stress and possible fines, too.

What is VAT and do I need to register for it ?

VAT is an acronym for Value Added Tax, a type of tax that businesses whose annual turnover is greater than £85000 are required to collect from customers on behalf of HMRC. Some businesses may choose to register for VAT even though they have not reached the required threshold of £85000 in turnover, because, for example, their purchases contain VAT while their sales do not, and in registering for VAT they could either balance their VAT expenditure or even get a rebate from HMRC if the VAT they paid is greater than the VAT they collected from their customers.

The standard rate of VAT is currently set at 20% of the price of an item. This means that if you want to get £100 for a product you wish to sell, and you are VAT registered, you will have to add VAT amounting to £20 pounds on top of your desired price. This further means that you will actually sell it to your customer for £120, then you will send £20 to HMRC and keep the £100.

What are the important dates for MTD for VAT ?

With respect to Making Tax Digital for VAT, it deployed in two stages. The first stage rolled out on 1 APR 2019, requiring all businesses whose turnover is above £85000, and are therefore requited by law to be VAT registered, to store digitally their financial records relating to VAT and to submit their VAT return online using HMRC-approved accounting software.

The second stage rolled out on 1 APR 2022 and required all VAT registered businesses regardless of their turnover (even those whose turnover is below the £85000 threshold) to comply with MTD (i.e. store their financial records relating to VAT digitally and to submit their VAT return online using HMRC-approved accounting software).

What do businesses need to do to be MTD compliant ?

In brief, there are two essential elements to MTD:

  • Businesses and organisations (which include those with income from property) are required to maintain digital accounting records. Maintaining paper records ceases to meet the requirements of the tax legislation.
  • Businesses and organisations are required to use functional compatible software products to submit updates and returns to HMRC. The current HMRC online tax return services for the relevant taxes are withdrawn when a business signs up for MTD.

 

It is no longer allowed to simply log in to the historic HMRC portal and manually type in and submit the VAT return figures. From now on, all VAT-registered businesses in the UK must first sign up for Making Tax Digital for VAT with HMRC, then use either a compatible software package or bridging software to file the UK VAT return via an API link (a link that bridges the accounting software with the HMRC portal).

You will have to install and use an HMRC- approved accounting software to store your financial data and to calculate and submit your tax returns. You can find a list of HMRC- approved accounting software here.

What records need to be kept for VAT ?

With respect to Making Tax Digital for VAT, the following information is now required to be recorded by businesses for each transaction in their accounting system:

  • The VAT on goods and services sold
  • The VAT on goods and services purchased
  • The correct tax point date (for purchase invoices received from vendors, this means recording the invoice date)
  • The VAT rate charged (standard rate, reduced rate, zero rate, exempt, or outside the scope of UK VAT)
  • The invoice value exclusive of VAT
  • Reverse charge transactions (i.e. where VAT needs to be self-accounted by the business)
  • Any adjustments made to the VAT return

 

It is also important to note that the VAT amount reported on both sales and purchases must be in GBP currency (Great Britain pounds). It is therefore strongly recommended that UK sales and purchases be entered into the accounting system in GBP using the relevant exchange rates required for VAT on sales and using the GBP amount shown on the purchase invoice received from vendors.

Are paper records still allowed ?

You can still keep paper records such as notebooks or paper receipts, but from 1 APR 2022 you are required to also keep these records in digital form using accounting software.

Though so far you may have found it useful to keep your records on a spreadsheet, you may still do so if you find it helps you better organise your records, but you must have accounting software in place into which you can upload the spreadsheet. This will ensure your records are MTD compliant.

What else do you need to know about MTD for VAT ?

More information on MTD for VAT can be found on the HMRC website here.

You can find more information on how to sign up for MTD for VAT here.

Accountants must ensure that suitable software is in place before they sign a client up for the MTD service. Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.

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