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HMRC is phasing in its landmark Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system. In 2017, HMRC announced the postponement of MTD for income tax until ‘2020 at the earliest’. MTD for VAT will be implemented in April 2019. The MTD for VAT regulations were laid before parliament on 28 February 2018.
Under the regulations, businesses with taxable turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using ‘functional compatible software’.
Compliance with the regulations is mandated for VAT return periods beginning on or after 1 April 2019.
MTD for VAT Guidance
HMRC have published VAT Notice 700/22: Making Tax Digital for VAT. The notice defines ‘functional compatible software’ and details the transaction-level data that needs to be recorded and retained within the software. Parts of the notice have force of law, and some businesses may find that a concession from keeping certain digital records may apply to them.
Since April this year, HMRC has been running a pilot scheme for MTD for VAT, which hopefully will iron out some of the issues that will arise in the implementation of the digital system.
Under the new MTD rules, businesses will have to use ‘functional compatible software’. This means a ‘software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)’. This must be capable of:
How are the records to be kept?
Keeping digital records will not mean businesses are mandated to use digital invoices and receipts, but the actual recording of supplies made and received must be digital. Software will not be available from HMRC, but a list of software providers who have tested their software as part of the pilot has been published. The use of spreadsheets will be allowed, but they will have to be combined with add-on software to meet HMRC’s requirements.
A business may use one piece of accounting software to record sales and purchases, transferring the totals into a spreadsheet to calculate the VAT return. The information is then sent to a piece of bridging software to submit the VAT return to HMRC. Here three pieces of software are involved. To qualify as functional compatible software, the links between them will have to be digital. The MTD for VAT notice explains that a digital link is one that involves no manual copying of data.
Whilst digital record keeping for income tax purposes will not be mandated until 2020 at the earliest, it is now possible to take part in the MTD for income tax pilot. Participation is available for sole traders and unincorporated property businesses, and will involve digital record keeping and making quarterly returns to HMRC.
If you have any questions or concerns over MTD for VAT, please do not hesitate to contact us.