This Content Was Last Updated on March 15, 2023 by Susan Albest
Making Tax Digital for VAT (MTD VAT) came into effect for most VAT registered businesses from April 2019 – this was for businesses compulsorily registered for VAT, that is to say with a turnover over the VAT threshold.
Businesses with a turnover below that level, but registered for VAT voluntarily, were required to join MTD VAT from April 2022.
Making Tax Digital for VAT is part of HMRCs overall Making Tax Digital programme:
- Making Tax Digital for VAT – from April 2019
- Making Tax Digital for Income Tax – from April 2026
- Making Tax Digital for Corporation Tax – date as yet unspecified
What changes Has MTD VAT brought In?
Two new key obligations are introduced:
- You must keep your accounting records Digitally and have Digital Links within differing parts of your records
- Submit VAT returns via your software – desktop or app – connected to HMRC via API. You can no longer submit VAT returns via HMRC website or on paper.
In terms of dates for being required to enter the scheme:
- Existing VAT registered businesses trading over VAT threshold – April 2019
- Businesses going over the VAT threshold for the first time after April 2019 – from the time they VAT register, or if VAT registered already, from when they go over the VAT threshold
- All other vat registered businesses from April 2022 – this will be VAT registered businesses with a turnover below the VAT threshold
The VAT threshold is £85,000 currently.
VAT returns are still normally submitted quarterly, but the Annual VAT Accounting Scheme still exists, as does the option of monthly returns for businesses who receive regular repayments.
Digital Record Keeping
The expectation is that the major part of your business record keeping system is digitalised and updated regularly, and for links between different data sources to be automated.
As part of the automation there must be “digital links” between different parts of your accounting systems – this sounds daunting, but put simply there must be a minimum of manual keying, or cut and paste. If you are using a programme or app then Digital Links are likely to be inherent, and the major implications here are for businesses using spreadsheets or businesses with more complex systems.
Generally the digitalisation requirement is from the stage that transactions are entered in your accounting system.
- eg – suppose you run a cafe and people mostly pay by cash. You do not have a till. You are not expected to keep a digital record of each customers cash payment, but you must keep a digital record of the daily total from customers, and this must be digitally linked to your vat submissions.
- eg – as above, but the cafe has a stand alone till. The daily z reading would be the entry to your digital records, not each customer transaction.
- eg – as above but the till is a EPOS system linked directly to your accounting system – the transactions can be entered individually or as a daily summary, either way they are digitally linked.
You can read more about HMRCs expectations for Digital Records and Digital Links in VAT Notice 700/22: Making Tax Digital for VAT
There was some talk when MTD VAT came in about HMRC obligations to record transactions regularly, rather than, say, writing them up at period end – this hasn’t actually made it to HMRCs guidance, but clearly people need to keep on top of their recording to comply with the quarterly submission requirements.
Choosing Software for Digital Record Keeping
There are a few choices in respect of software for Digital VAT:
- Our recommendation to clients is FreeAgent – which we believe gives a good mix of functionality verses usability for most smaller businesses. We are able to offer our clients a negotiated discount against normal prices.
- Other options for desktop / cloud programmes and apps include Sage, Xero and Quickbooks.
- Feature bank accounts are coming on stream that combine banking with record keeping – our review of these suggests they need a bit more development yet before they are a reliable choice.
- Spreadsheets – a spreadsheet can still be used, but (a) must be used with commercially available “Bridging Software” to connect to HMRC and transmit vat and (b) within the spreadsheet all internal links must be automatic – no re-keying or cut and paste.
- With the roll out of Making Tax Digital for Income Tax Self Assessment there are various other systems coming to market, and its worth following trends as we expect to see various MTD compliant systems will be launched during coming years – however be aware of, and sceptical about, free offerings which come and go.
As a firm we are “open platform” so will work with your choice of software where possible. We expect our clients to make available logins and passwords for us to access their cloud system if asked, and to meet the costs of any software supplier charges for accountants logins (some software companies charge, some don’t).
Whatever software you choose, it needs to be able to connect to HMRC and be HMRC approved
FreeAgent has the advantage of giving us a “client portal” where we can see all of our clients records, so enables us to provide the most efficient service to you all other things being equal.
Our Involvement as Your Accountant
Historically VAT was submitted by businesses themselves rather than their accountants, although in the past couple of decades there has been a noticeable trend away from this as the VAT regime has got more complex.
Most of our Fixed Fee quotes do not include regular VAT, but we are happy to tailor service packages to suit your needs, eg:
- Quarterly check pre submission
- Quarterly check and submission for you
- “Brown envelope” service for those who would like to outsource all data processing and accounting entries to us
Just ask, and we will work with you to create a service package suitable for your needs.