HMRC launched ‘Making Tax Digital for VAT on the 1st April 2019. In this article, we explain how the new rules will work, who can claim an exemption and make you aware of all the key dates.
What is Making Tax Digital (MTD) for VAT?
Making Tax Digital for VAT is the start of HMRC’s new digital tax scheme which they think will improve the standard of record keeping by many businesses and so improve the accuracy of returns they make.
The two key elements of the new Making Tax Digital for VAT rules. These are:
- a requirement to maintain business records digitally; and
- a requirement to file the quarterly VAT return using MTD compliant software enabled software. (see our guide here for the top MTD software)
Will MTD for VAT apply to my small business?
If you are an individual, sole trader or business (including a limited company) and you are VAT registered, and you have VATable turnover of £85,000 or more in the 12 months ending 31 March 2019 then you will meet the criteria of the new MTD regime, unless you are have an exemption.
A key point catching a lot of small businesses is if your turnover is below £85,000 then you are voluntarily registered for VAT (assuming you are a UK business) and are NOT required to join the scheme.
Any individual, sole trader or business which is voluntarily registered for VAT or is exempt can still use the MTD for VAT regime if they want.
A small business has to register for VAT after 1 April 2019 due to its turnover reaching the registration threshold in the previous 12 months and will have to comply with the Making Tax Digital for VAT rules as soon as they become VAT registered.
Do I get an exemption for MTD
If you are already exempt from filing your VAT returns online then you can continue to do so because you will be exempt from the new scheme.
If you meet one of the criteria below you will also have an exemption for MTD:
- It is not ‘reasonably practicable’ for you to use digital tools to keep your business records or submit your VAT Returns because of age, disability, remoteness of location or for any other reason.
- You or your business are subject to an insolvency procedure.
- Your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
HMRC have produced guidance on claiming exemption from MTD for VAT. If you wish to claim exemption you should read the guidance and call or email HMRC.
If a claim for exemption is unsuccessful you will have to comply with MTD as soon as reasonably possible .
I am not exempt – what are they key dates for Making Tax Digital?
The new scheme begins on 1 April 2019, however the exact date from which you must be MTD for VAT compliant depends on what your VAT periods are:
VAT quarter end date is 31 March 2019, or you file monthly, you must be compliant with MTD from 1 April 2019.
VAT quarter end date is 30 April 2019 you must be complaint with MTD from 1 May 2019.
VAT quarter end date is 31 May 2019 you must be compliant with MTD from 1 June 2019.
If your business become VAT registered after 1 April 2019 due to reaching the turnover limit, you must be compliant with MTD from your registration date.
There is a small group of small businesses who can delay signing up to MTD for VAT programme until 1 October 2019 they are listed on the government website. The list includes small businesses who complete annual VAT returns. HMRC have written to all businesses who must join MTD for VAT on or after 1 October 2019. Contact HMRC if you think you haven’t received a letter and you think you can defer.
What do I have to do to be compliant with MTD?
As above, there are two elements to the new MTD rules. These are:
- a requirement to maintain business records digitally; and
- a requirement to file the quarterly VAT return using MTD compliant software enabled software. (see our guide here for the top MTD software)
What are digital business records?
Under MTD for VAT, the records you are required to keep to support your VAT returns must be kept digitally in what is known as ‘functional compatible software’. This will usually be either be cloud accounting software like Xero or Quickbooks or a spreadsheet based system. Key data from business invoices and receipts must be recorded digitally but you don’t have to keep or scan the invoices and receipts themselves but we recommend you retain them this way for ease of review. See HMRC’s guidance for more detail.
There is information on our website to help you choose the best accounting software or bridging software, the tool HMRC provides is far too basic and doesn’t take into account the qualify or the product
How does my small business submit a MTD for VAT return
Once you are signed up to the MTD for VAT scheme , you cannot submit a VAT return using the old HMRC portal as it would be non compliant.
Instead, the MTD software must be used to file the VAT return with HMRC. Most of the newer cloud accounting software solutions (Quickbooks, Xero, Freeagent and Sage) will have this functionality built in. However if you are still using spreadsheets or older software (Sage 50 for example) you will need to purchase bridging software which will link your spreadsheet to HMRC’s systems and allow the VAT return to be filed. Therefore you will still be compliant as the combination of Excel and bridging software will mean you fulfil the criteria.
What software is best for my small business?
HMRC have not developed their own software and have relied on private enterprise to provide solutions – we created a guide for small businesses showing the best cloud accounting solutions and bridging software options in our Top 8 Software Solutions for Making Tax Digital
Does my small business need to sign up myself?
This is not automatic, there is a sign up process that you must follow to register for Making Tax Digital for VAT. You should sign up at least 7 working days after filing your last VAT return under the old rules, otherwise there may be a risk that the the system doesn’t record properly.
Follow this link to see the government sign up process HMRC Guide.
If HMRC agree you are exempt from MTD for VAT then you must continue to file your VAT returns as you have been doing in the past.
What will happen if I fail to register for Making Tax Digital on time?
HMRC have made it known that there will be a ‘soft landing’ period for the MTD scheme . That means if you have made a genuine effort to get MTD compliant but have failed to do so you are unlikely to be penalised. If there is no evidence the business made an effort then there may still be penalties.
As an ecommerce accountant we offer discounted partner only subscriptions to the big cloud accounting software providers like Quickbooks and Xero. We also offer free onboarding for software purchased through us. So if you need any advice on what bridging software to get or you want to see our discounted pricing contact us through the website
