VAT – Making Tax Digital

At AHACCOUNTANTS, we provide expert guidance on the Making Tax Digital for VAT (MTDfV) initiative, which significantly transforms how businesses manage VAT records and submit returns. If you’re in the Nottingham area, we can help you navigate the implications of this digital shift for your business.

Overview of Making Tax Digital for Business

Introduced in the 2015 Spring Budget, the MTD initiative aims to modernize the UK tax system by moving towards a fully digital framework. This will see tax returns replaced by digital tax accounts for ten million individuals and five million small businesses.

Revised Timescales

The government adjusted the implementation schedule for MTDfB to address concerns from industry experts and the accountancy sector, allowing ample time for businesses to adapt. The MTDfV specifically took effect on 1 April 2019.

Key Aspects of MTDfV

• Digital Record Keeping:
  All VAT-registered businesses must maintain digital records for VAT purposes and submit their VAT return information using software that is MTD functional compatible. Only a few businesses are exempt, typically those already exempt from filing VAT returns online or those that are insolvent. HMRC may grant exemptions in limited circumstances, such as disability or location-related issues.
• Mandate for All VAT-Registered Businesses:
  Since April 2022, MTDfV has been mandatory for all VAT-registered businesses, including those voluntarily registered below the £85,000 threshold. If this affects you and you wish to consider deregistering for VAT, we can assist you.

VAT Returns

Businesses subject to MTDfV must use compatible software to submit their VAT returns. The data will be extracted from digital records to populate the return. Importantly, these changes do not alter statutory VAT return deadlines or payment dates.

Third-Party Software and Digital Records

HMRC does not provide MTDfV software, and manual record keeping is not acceptable. Businesses must utilize specified ‘functional compatible software’ to:

• Keep digital records as mandated by MTDfV rules.
• Preserve these records for up to six years.
• Generate and submit VAT returns digitally via HMRC’s Application Programme Interface (API).

Records required include:

• Designatory data.
• VAT accounts linking primary records and VAT returns.
• Details of supplies made and received, including applicable VAT rates and input tax amounts.

While businesses are not required to use digital invoices, the recording of supplies must be digital. Non-digital invoices should be kept as hard copies for VAT purposes.

Software Considerations

Digital records do not need to be stored in a single program. Businesses can use various compatible formats, including spreadsheets, as long as they link the data digitally. From 1 April 2021, all software programs used must be linked digitally, prohibiting manual data transfer.

Digital Links

A digital link involves the transfer of data between software applications. Acceptable digital links include:

• Linked cells in spreadsheets.
• Emailing spreadsheets for data importation.
• Using portable devices for data transfer.
• XML, CSV imports/exports, and automated data transfers.

Manual transfers (like copying data by hand) are not permitted under MTD.

Transition Period and Penalties

For VAT return periods from 1 April 2019 to 31 March 2020, penalties for lacking digital links will not be imposed. However, from 2020, HMRC will enforce penalties for non-compliance. Importantly, the submission process to bridging software must always remain digital, exempt from the soft landing provisions.

Exemptions

Only a small number of businesses may be exempt from MTDfV. If you believe your business qualifies for an exemption, please reach out to us for guidance. Businesses can appeal HMRC’s refusal of an exemption.