Making Tax Digital for VAT

Overview

From 1 April 2019, all VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) are required to comply with new HMRC Making Tax Digital reporting requirements. This applies to all VAT registered charities although some will have their start date deferred to 1 October 2019 (see below).

The information required and deadlines for sending VAT returns and making payments are not changing,  but businesses will have to keep digital records and send the returns to HMRC using MTD-compatible software. HMRC believes that the move to digital integration will eliminate many of the existing paper-based processes, making the system, more effective and efficient and easier for taxpayers to get their tax right.

CTG is aware that there is still some confusion about Making Tax Digital and has prepared a “mythbuster” for charities to address some common misconceptions.

Guidance

HMRC has published VAT Notice 700/22: Making Tax Digital for VAT, which provides full guidance on how MTD will work in practice.

HMRC has created YouTube videos on:
HMRC has published a helpful stakeholder communications pack including FAQs on MTD for VAT. You can also access HMRC webinars here

 

Software

HMRC is not offering its own software products, but will provide the Application Programming Interfaces (APIs) that commercial software developers will use to develop a range of applications that will enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that that links 2 or more software programmes together, allowing them to exchange data.

HMRC is working with a wide range of software suppliers to produce suitable software for businesses and their agents. Charities are encouraged to plan ahead to identify their software needs. In some cases it will just be a case of updating existing software, but in others, new or bridging software will need to be purchased. Find out more here.

Timeline – start date deferred for some charities

Most businesses have a mandated start date for MTD of 1 April 2019. However, HMRC has announced that it will delay mandation of MTD VAT for certain charities until 1 October 2019.

Charities that are a trust or a not for profit organisation not set up as a company are mandated to MTD VAT from 1 October 2019. Charities operating within a VAT group are also deferred. Charities should be contacted by February 2019 if their start date is being deferred. Read more here.

Other corporate charities will be required to start using MTD from 1 April 2019. The full MTD timetable (including details of the “soft landing” period outlined below) can be read here.

Signing up for Making Tax Digital

All customers sign up to the MTD VAT service via gov.uk. You may authorise HMRC to receive data from (and send data to) an agent on your behalf in relation to any Making Tax Digital service – read more here.

There are different webpages for business-led and agent-led sign ups. Customers can sign up to MTD VAT here and agents can sign up their clients to MTD VAT here.

Charities that have received deferral letters will be able to sign up to the MTD VAT pilot in the Spring 2019 (which we understand to be from April). Charities in VAT groups and corporate charities mandated to start MTD in April 2019 can access the pilot already.

There is no limit on the number of charities that can join the pilot. HMRC is encouraging all organisations to sign up as soon as they are able.

What is required?

Digital record keeping

All VAT registered businesses must keep and preserve certain records and accounts.You do not need to keep any additional business records because of MTD. However, business records must be kept digitally within functional compatible software to be compliant. Your 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 the business, including business name and principle business address as well as your VAT Registration Number and details of any VAT accounting schemes you use.

To be MTD compliant software must be able to:

  • record and preserve digital records
  • provide to HMRC information and returns from data held in those digital records by using the API platform
  • receive information from HMRC via the API platform.

The complete set of digital records to meet MTD requirements does not all have to be held in one place or in one program. Digital records can be kept in a range of compatible digital formats. Taken together, these form the digital records for the VAT registered entity. Read more here.

Digital links

Data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records.  Each piece of software must be digitally linked to other pieces of software to create the digital journey.

A ‘digital link’ is one where a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications.  HMRC does not consider the use of ‘cut and paste’ to select and move information, either within a software program or between software programs, to be a digital link. Read more about digital links here (at 3.2.1) and examples of where digital links are required here.

Transferring data manually within or between different parts of a set of software programs, products or applications that make up functional compatible software is therefore not acceptable under MTD, except in the case of permitted adjustments (see below).

Adjustments

However, where you are allowed or required to adjust the input tax claimed or output tax you owe according to the VAT rules you must record this adjustment in functional compatible software. Only the total for each type of adjustment will be required to be kept in functional compatible software, not details of the calculations underlying them. If the adjustment requires a calculation, this calculation does not have to be made in functional compatible software. If the calculation is completed outside of functional compatible software then digital links are not required for any information used in the calculation. Full details can be found here (see 3.4).

Charities are also encouraged to refer to this guidance on permitted adjustments relevant to charities under MTD for VAT previously agreed between CTG and HMRC.

Soft-landing period for the digital links requirement

HMRC will allow a period of time (‘the soft landing period’) for businesses to have in place digital links between all parts of their functional compatible software. Read more here (at 3.2.1.1).

For the first year of mandation businesses will not be required to have digital links between software programs. This means that if Making Tax Digital rules first apply to your charity from either a:

  • VAT period starting on or after 1 April 2019, you will have until your first VAT return period starting on or after 1 April 2020 to put digital links in place
  • VAT period starting on or after 1 October 2019, you will have until your first VAT return period starting on or after 1 October 2020 to put digital links in place

During the soft landing period only, where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.

Exemptions

Exemptions from MTD for VAT are the same as those that are already in place for online filing for VAT. Some examples are given above. If you are already exempt from filing your VAT return online, you will continue to be treated as exempt for MTD for VAT.

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