Making Tax Digital (MTD) will take effect on 1 April 2019 and will mean a significant change in procedures for all UK businesses that are VAT registered and trade above the registration threshold ie annual sales subject to VAT (including zero-rated sales) exceed £85,000.
MTD means that a business must keep certain information in a digital formal (referred to as the ‘electronic account’ in the draft regulations) and it must also submit digital VAT returns each period. It takes effect from the beginning of the first VAT period on or after 1 April 2019, so this would be June 2019 for a business submitting calendar quarter returns.
The electronic account
In reality, MTD is all about the software used by a business to complete its VAT returns. Relevant information about sales and purchases in the electronic account of a business must be kept in ‘functional compatible software’. This means a software programme which allows information to be recorded in an electronic form which sends and receives information to/from HMRC using the API platform (including API-enabled spreadsheets). It is possible to use more than one software programme but there must be a digital link between them.
What information must be kept?
The following information must be kept in the electronic account:
- Designatory information – the name and address of the business owner, his VAT registration number and any VAT accounting schemes he uses eg flat rate scheme.
- Sales and purchases – including the time of the sale or purchase (known as the tax point), the rate of VAT charged and the value of the transaction excluding VAT. In the case of sales, there will be a split shown between sales subject to 0%, 5% and 20% VAT, as well as those that are exempt from VAT. For expense items, the amount of input tax claimed will also be recorded.
- VAT account – this is the audit trail that shows the total VAT payable and reclaimable for the period in question, including any adjustments for eg previous errors.
Submitting the VAT return
The compatible software will calculate the figures to be declared on the VAT return from the digital records. It will then show the return to the business owner, who must confirm that it can be submitted online to HMRC. Once the return has been submitted, the business will receive confirmation from HMRC through its software that it has been safely received. An agent can submit the return on behalf of a business but to do this, the agent will need access to the functional compatible software used by the business.
The good news is that if a business is registered for VAT but trades below the annual £85,000 limit, then it does not need to get involved with MTD. This situation applies when a business is registered for VAT on a voluntary basis. Finally, be aware that the intention remains for MTD to be extended to other taxes but not before April 2020 at the earliest.