The Making Tax Digital (MTD) for VAT deadline is getting closer. From 1 April 2019, all UK businesses above the £85,000 VAT threshold will need to keep records digitally and submit VAT returns to HMRC using MTD-compatible software.

If your current system is MTD compliant, or you are taking steps to ensure compliance the following may be disregarded.  However, if MTD is new to you, please consider that there are steps you need to take prior to 1st April 2019 to ensure your business is ready for the upcoming changes.

Getting your business ready with Xero

To comply with HMRC’s new regulation, we’ll need to move your accounts from your current solution onto Xero online accounting software.  With Xero, your accounts will be secured safely and securely in the cloud and VAT returns can easily be submitted quarterly directly to HMRC.

Over the coming weeks and months, will be working to transition all our affected clients to Xero, the UK’s leading online accounting software.  We’re really excited to get you set up, because Xero comes with so many more benefits than just being MTD compliant – and, we’ll be able to provide you with a much greater experience.

Why Xero?

More than 300,000 subscribers across the UK and more than one million around the world use and love Xero because you can:

Automate calculations: Stop worrying about complicated formulas. Let Xero do the sums automatically so we can focus our time providing you with the right advice at the right time

View your key financials: Check your bank balances, invoices, bills and expense claims in real-time

Sync bank statements: Use direct banks to connect your bank to Xero for quick and easy reconciliation

Submit the right data: Be MTD-ready and submit your quarterly returns through MTD-compatible software

Feel safe and secure: Rest easy, knowing that Xero provides multiple layers of data protection

Frequently asked questions about MTD for VAT

What is Making Tax Digital?

Making Tax Digital (MTD) is the Government’s vision for a ‘transformed tax system’. The aim is to create a more modern, digital service which will help businesses get their tax right, with technology making it easier for them to do so.

HMRC estimates that over £9 billion is lost annually in tax due to errors and mistakes, and it hopes that digital record keeping will help ‘to prevent errors associated with manual processes.’

Who will be affected and when do the changes come into force

From April 2019, VAT registered businesses (including the self-employed, landlords, unincorporated businesses, companies, LLPs and charities) with turnover above the VAT registration threshold (currently £85,000) will have to:

Keep their records digitally (for VAT purposes only)

Provide their VAT return information to HMRC through Making Tax Digital compatible software such as Xero

Businesses can take the opportunity to provide quarterly updates for other taxes too, but there will be no mandatory requirement to do so until at least 2020

Businesses registered for VAT but with turnover below the VAT threshold can opt in and file their VAT information via MTD if they wish.

What are the benefits to businesses Making Tax Digital?

HMRC says “Software will help businesses to stay on top of their record keeping, allowing them to better understand how their business is performing”.

A digital system means

Always knowing where you stand when it comes to tax

Having access to tax information online in a single place

Being able to work online collaboratively with your accountant

Being able to plan and budget more effectively

Can I still keep my records manually and simply file the VAT return through the HMRC VAT portal?

No. The new regulations mandate that businesses must keep digital records in compatible software, which can connect to HMRC via an Application Programming Interface (API).

Do I have to purchase a software package?

The regulations state that a business in scope for MTD must use functional compatible software to meet the new requirements. So, if you are not currently using a compatible software package you will need to purchase software. An alternative option is to ask Blow Abbott to maintain your records and file your VAT return on your behalf.

What is ‘functional compatible software’?

Functional compatible software means a piece of digital software that records business transactions electronically and which can directly communicate with HMRC digitally via their API to report the required figures under MTD for VAT.

An example is an accounting software package that connects directly to HMRC’s VAT portal. There are lots of packages available on the market for small and medium sized businesses, the most well-known are Xero, Quickbooks and Sage but there are many more.

Do Excel spreadsheets count as ‘functional compatible software’?

Not in themselves, no. HMRC has stated that records can be maintained on spreadsheets, but there has to be some linking/bridging software that can communicate with HMRC’s API in order to comply with MTD for VAT. This only likely to be available as a short term solution.

What information will I need to keep digitally for VAT purposes?

You will need to keep a record of all sales and purchases so that the totals for applicable VAT outputs and inputs can be calculated for each return period. Additionally, the underlying records need to include the transaction date, the rate of VAT that applies and the invoice total.

There are some exceptions for users of different VAT schemes. For example:

Retail schemes

Retail scheme users will, by HMRC notice or direction, be permitted to record electronically sales transaction data based on daily gross takings, rather than recording details of each sale.

Flat Rate Scheme

Businesses eligible to use the Flat Rate Scheme account for output VAT as a specified percentage of turnover, and don’t claim input VAT on most expenses.

Scheme users keep records of sales but the only records of purchases they must keep are those relating to capital goods with a VAT inclusive value of £2,000 or more. Digital record keeping requirements for flat rate scheme users will mirror current record keeping requirements.

How long do I have to keep digital records for?

Businesses will need to keep digital records for up to 6 years.

Do I have to keep records digitally for other taxes?

At the moment, businesses will only need to keep records digitally for VAT purposes. However, HMRC have stated their ambition to ‘become one of the most digitally advanced tax administrations in the world’ so it is likely that the scope of the programme will expand in future to include Income Tax and Corporation Tax. This could into place as early as April 2020 but we will keep you updated as soon as we have more information.

I am currently exempt from submitting my VAT returns online – will this change?

No. If a business cannot go digital, it will not be required to do so and will not have to meet the obligations of Making Tax Digital. The exemptions under Making Tax Digital mirror the existing VAT online filing exemptions.

I don’t have internet access. Can I be exempted from the scheme?

If you can’t use a digital system because of your age, a disability or because of where you live (e.g. you don’t have internet access), or if you object to using computers on religious grounds you will be able to apply to HMRC for an exemption from the scheme. Anyone wanting to apply for an exemption will need to contact the HMRC VAT helpline on 0300 200 3700 to discuss alternative arrangements.

I currently submit my VAT return monthly or annually. Will I have to move to quarterly reporting?

No. Where businesses have alternative reporting arrangements, these will be maintained. Businesses submitting monthly or non-standard returns will continue to do so as long as they keep digital records and submit their annual or monthly VAT return through functional compatible software.

What happens if I don’t / can’t comply?

HMRC has suggested it will take a soft approach to non-compliance between April 2019 and April 2020. They plan to use a points-based system where failure to submit records on time accumulates penalty points for each transgression. At a certain threshold, penalties will then be charged for late or non-submission. They have suggested that penalty points incurred will expire after a further period of ‘good compliance’.