Making Tax Digital (MTD)

Posted on August 25, 2018

Further to our previous Client Memo informing you of the impending Making Tax Digital (MTD) we write to provide more detailed information as far as that is currently available.

MTD for businesses

HMRC’s vision to digitalise the UK tax system has commenced. Businesses and landlords will be required to use commercial software to maintain their records and to update HMRC quarterly, this begins with VAT.

Timeline for MTD

  1. From April 2019: VAT reporting by all VAT registered businesses with turnover above the VAT threshold.
  2. From April 2020, at the earliest: All other taxes (income tax and corporation)


From April 2019 all VAT registered businesses with turnover above the VAT threshold will be required to maintain digital records and will need to send their VAT information to HMRC using third party commercial software.

HMRC’s online portal will remain available to all other businesses that complete a VAT return but have turnover below the VAT threshold.

MTD for VAT will apply to VAT registered businesses with turnover above the VAT threshold. This includes unincorporated businesses, companies, LLPs, and charities. Businesses registered for VAT but with turnover below the VAT threshold can opt in and file their VAT information via MTD if they wish.

What we know so far…

Start date As of 01 April 2019, HMRC will require you to submit VAT returns using accounting software. This means you’ll no longer be able to submit manually through the HMRC gateway. 
Exemptions  The exemptions that currently apply for electronic VAT filing will be extended to cover MTD for VAT. There will be an automatic exemption for businesses which are registered for VAT but have turnover below the threshold. These businesses must elect for the exemption not to apply if they wish to submit their VAT information under MTD.
Free software At this time we understand there will be no free software for MTD for VAT. HMRC have stated that they are working closely with software providers to ensure that a range of suitable products will be available.
Software requirements Commercial software must be able to:
• Keep records in a digital form.
• Preserve digital records in a digital form.
• Create a VAT return from the digital records.
• Provide HMRC with VAT data on a voluntary basis.
• Receive information from HMRC via the API (application programme interfaces) platform. This will allow HMRC to send ‘nudges’ to the business/agent.
Spreadsheets The use of spreadsheets will be permitted although they will need to be combined with third-party commercial software, using APIs, to ensure a seamless flow of data from the business to HMRC (and vice versa). 
Digital record-keeping requirements HMRC has confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally.
HMRC has stated that the following records will need to be kept digitally:

Designatory data: 

• Your business name 
• The address of your principle place of business 
• Your VAT registration number 
• A record of any VAT accounting schemes that you use. For each supply you make you must record: 
• The time of supply 
• The value of the supply 
• The rate of VAT charged. If you make multiple supplies at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice or receipt that have the same time of supply and rate of VAT charged. You must also have a record of outputs for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.      

For each supply you receive you must record: 
• The time of supply 
• The value of the supply including any VAT that is not claimable by you 
• The amount of input tax that you will claim. 

If more than one supply is on an invoice you can record the totals from the invoice. 

VAT account 
The VAT account is the link – the audit trail – between your business records and your VAT return. Under MTD for VAT, the information required to be held in the VAT account must be kept digitally (the regulations refer to this as your “electronic account”), and the information in that electronic account will be used by functional compatible software to calculate and fill in your VAT return. 

To show the link between the output tax in your records and the output tax on the return, you must have a record of: 
• the output tax you owe on sales 
• the output tax you owe on acquisitions from other EU member states 
• the tax you are required to pay on behalf of your supplier under a reverse charge procedure 
• the tax that needs to be paid following a correction or error adjustment 
• any other adjustment required by VAT rules 

To show the link between the input tax in your records and the input tax on your return you must have a record of: 
• the input tax you are entitled to claim from business purchases 
• the input tax allowable on acquisitions from other EU member   states 
• the tax that you are entitled to reclaim following a correction or error adjustment 
• any other necessary adjustment 

Records must be kept for a minimum of six years (or 10 years if you use VATMOSS). Digital records will need to be maintained for six years following deregistration.

Monthly and non-standard returns Businesses will still be able to submit monthly and non-standard returns under MTD.
Periodic updates  Businesses can, if they wish, provide information more frequently than quarterly.
Flat rate scheme Businesses will still be able to use the flat rate scheme under MTD meaning digital records of purchase invoices will not be required (unless they relate to capital items which cost more than £2,000 including VAT). 
Annual accounting scheme Users of the annual accounting scheme will continue to send in one annual VAT return rather than quarterly reports under MTD.
Retail scheme Retailers will be able to record gross daily takings rather than each individual transaction
Amendments The existing error correction rules will apply under MTD. In some cases, amendments can be made through the MTD compatible software. 

MTD will present a challenge for many businesses, many will have to update their software, others will need to purchase software for the first time and some will have to contract out the digital recording of transactions and submission of VAT returns to HMRC. All businesses will incur additional costs due to MTD and they need to take this into account when considering their cash flow.

We strongly recommend that you start to consider the consequences of MTD on your particular business and what will be required to ensure you are compliant prior to April 2019. Garratts are here to assist wherever we can and your engagement partner  and managers will be pleased to discuss your requirements with you and provide advice and help on a timely basis.

More information can be found on HMRC site (click here..).

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