If your clients have a VAT Registered business with a taxable turnover above the VAT registration threshold (currently £85,000) they are required to keep digital VAT business records and send returns using Making Tax Digital (MTD)-compatible software. The vast majority of businesses will need to do this for VAT periods starting on or after 1 April 2019. Businesses with a taxable turnover below the VAT threshold can also sign up for MTD for VAT voluntarily.
The MTD pilot for VAT started in April 2018 and is now open to VAT businesses and their agents mandated to use the service from April 2019.It’s important that your clients have the appropriate software package, so if they already use accounting or record keeping software you should also enquire from those software provider to find out when it will be updated for MTD.
When MTD for VAT will be mandatory for business
If the taxable turnover drops below the VAT registration threshold at any point after 1 April 2019 the clients are still required to continue to keep digital records and send HMRC their VAT returns using MTD-compatible software. This obligation doesn’t apply if they de-register from VAT or if they are exempt from MTD for VAT.
For a small minority of businesses that have more complex requirements, HMRC have made the decision to defer mandation by 6 months to ensure there is sufficient time for testing the service with them in the pilot before they are mandated to join. These businesses have until 1 October 2019 to start keeping records digitally and using MTD-compatible software to send their VAT returns to HMRC.
This applies to those that fall into one of the following categories: trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.
What happens if the taxable VAT turnover is below the VAT MTD threshold
If the clients have a taxable turnover below the VAT threshold they can still sign up for MTD voluntarily. HMRC is encouraging businesses with a taxable turnover below the VAT threshold to sign up so they can also benefit from MTD. Businesses can also sign up for MTD for Income Tax. This means, subject to the business type, you can further streamline the clients’ business processes. You can read more about MTD for Income Tax further down.
What the businesses need to do to be ready to sign up for MTD
Your clients will need to keep their business records digitally from the start of your accounting period. If they already use software to keep business records, check the software provider’s plans to introduce MTD-compatible software.
If they don’t currently use software, or their software won’t be MTD-compatible, you’ll need to consider what software is suitable for their requirements.
HMRC has published details of the VAT and Income Tax software available for MTD.
Clients using spreadsheets for business records
A spreadsheet can be used to calculate or summarise VAT transactions to arrive at the return information needed to send to HMRC.
If you use spreadsheets to keep your clients’ business records, you’ll need MTD-compatible software so that you can send HMRC your clients’ VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD-compatible. You can read about the ‘bridging software’ below.
The information must not be physically re-typed into another software package.
Records that you need to keep digitally for MTD for VAT
MTD does not require your clients to keep additional records for VAT, but to record them digitally.
The clients’ digital records should include, for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged. They should also include information about your business, including business name and principle business address, as well as their VAT registration number and details of any VAT accounting schemes they use.
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. If more than one application is being used, data that flows between those applications must also be exchanged digitally.
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.
You need to discuss with the software providers in case of any doubt.
‘Bridging software’ is HMRC’s description of the digital tool that can take information from other applications, for example, a spreadsheet or an in-house record keeping system, and lets the user send the required information digitally to HMRC in the correct format.
Finding out what software is available for MTD
HMRC has published details of the VAT and Income Tax products that are currently available and will be adding to this in the coming months as the pilots progress and more products become available. You can find details of all the software including bridging software at the HMRC page along with features of all the software listed.
HMRC has launched a voluntary MTD pilot for Income Tax in spring 2018 and you may want to consider joining this. Read about how to join the MTD pilot and about using software to send Income Tax updates.
You can find out which software is already available to send Income Tax updates for MTD on GOV.UK.