Despite Making Tax Digital (MTD) for VAT being only six months away, research carried out by the ICAEW (Institute of Chartered Accountants in England and Wales) last month revealed that over 40% of affected businesses are still unaware of it.
It was announced on 13th July 2017 that for businesses that are VAT registered and have a taxable turnover above the registration threshold (currently £85K) for accounting periods on or after 1st April 2019, must keep digital business records and file their VAT returns with HMRC using MTD compatible software. For some businesses this will mean a sea change in their book-keeping, as only 54% of VAT registered businesses currently use accounting software.
Many businesses currently type the figures for their VAT return directly into a form on the government’s GOV.UK website but from April of next year, that will no longer be possible and businesses will be compelled to use accounting software to complete their VAT returns.
MTD does not require business to keep additional records for VAT but rather to record them digitally from the start of their accounting period. For those that already use accounting software, they should check their software provider’s plans to introduce MTD compatible software. Those that don’t currently use software, or their software won’t be MTD compatible, they will need to consider what software is suitable for their requirements.
Digital records, for each supply, will need to include:
Later in the year, HMRC will be publishing details of the VAT software available when they make the private VAT pilot – which started in April of this year – a public one.
Details of software providers currently supporting MTD for VAT can be found here MTD software providers.
Compatible software is a software product or set of software products that between them support the MTD obligations of keeping digital records and exchanging data digitally with HMRC through the MTD service.
Digital records can be kept in a range of compatible digital formats. They do not all have to be held in the same place or on one piece of software. For example, a spreadsheet can be a component of digital record keeping provided the product that consolidates records (or summary records from the spreadsheet) can exchange data digitally with HMRC.
HMRC will give businesses until 31 March 2020 to make sure there are digital links between software products. Before that date, cut and paste will be an acceptable way to transfer information.
The exception to this is where return information is to be transferred to a software product enabled for an Application Programming Interface (an API provides a secure link between software and HMRC) and designed to submit the 9-box VAT return (such as bridging software). In those circumstances the transfer of information must only be digital.
If in doubt, businesses should discuss with their agent or software provider.
A spreadsheet can be used to calculate or summarise VAT transactions to arrive at the return information a business needs to send HMRC.
If you use spreadsheets to keep business records, you’ll need MTD compatible software so that you can send HMRC your VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD compatible.
‘Bridging software’ is HMRC’s description of the digital tool that can take information from other applications, e.g. a spreadsheet or an in-house record keeping system, and lets the user send the required information digitally to HMRC in the correct format.
As part of their research, the ICAEW surveyed a number of businesses about how they intended to deal with the changes which showed:
Anita Monteith, ICAEW Technical Tax Manager, said:
“We continue to fully support HMRC’s ambition to increase the use of digital technology, but we are concerned that based on these results many businesses are not going to be ready for implementation in April 2019. The lack of awareness among businesses about MTD is of concern and needs to be addressed: the communications on MTD do not appear to be getting through to VAT registered businesses.”
HMRC recently kicked off their MTD campaign by producing simplified guidance MTD guidance, with plans to provide more information at a later date including sending direct mail to all businesses affected by the changes.
A HMRC spokesperson said:
“We are starting to ramp up communication activity with businesses, initially with information to help them prepare for MTD and later how they can sign-up for the service.”
MTD for VAT is happening so don’t get caught cold and prepare now so that your business experiences a smooth transition.