Making Tax Digital requires businesses to not only submit their VAT returns electronically, but also to maintain their underlying records electronically too – in what the government call an ‘electronic account’. This information must be kept in ‘functional compatible software’. This means a software program (or group of programmes) which allows information to be recorded in an electronic form and which sends and receives information to and from HMRC digitally.
So although nearly all businesses now submit their VAT returns on-line, that is not sufficient to comply with the Making Tax Digital regulations. The Chartered Institute of Taxation (CIOT) has highlighted that although 99% of VAT returns are submitted electronically, only 12% are filed via software. This leaves an awful lot of businesses needing to take action before April 2019.
The main thing you should do is check with your software suppliers whether their product will provide you with a Making Tax Digital solution.
In July 2018, HMRC issued its first list of software suppliers who have tested their software in the HMRC test environment, and demonstrated a prototype to HMRC. This list includes Xero, SAGE, Quickbooks and Farmplan. The full list can be accessed here.
It is important to remember that not all versions of software will support Making Tax Digital – we understand from some suppliers that only the latest versions will be compliant, so it is essential that you check with your supplier as soon as possible to make sure you are on a suitable version. Newer software may not be compatible with older computer systems, so this is something else you may need to consider.
If you use bespoke or niche software, we recommend that you talk to your software supplier very soon, to make sure they are on track to ensure you are ready for Making Tax Digital before April 2019.
Once Making Tax Digital kicks in, it is vital that you are keeping your VAT records accurately and on a timely basis. If your current records tend to be a bit messy (for example, payments taking a while to get allocated properly to invoices, fixed assets not recorded properly for VAT purposes), this would be the time to look at your processes and think how they need to be changed or improved. As well as helping with your Making Tax Digital compliance, this may also be a chance to make sure you have better, timelier financial information to help you run your business more effectively. We recommend you get in touch with your Old Mill contact, or contact us using the link below, and we can talk to you about the best solution for you particular circumstances.
No – you do not need to keep underlying records electronically. So, for example, if you still store your sales or purchase invoices in hard copy you can continue to do so, as long as the transaction is recorded electronically. Also, if you have multiple supplies recorded on one invoice which are subject to the same rate of VAT, these can be recorded electronically as a single supply. Retail scheme users can record Daily Gross Takings, and do not need to record each underlying sale separately.
The key requirement of Making Tax Digital is that all records that contain your VAT records must be held digitally and all links between them are digital.
For example, let’s say you currently record your sales records in excel, and your purchase records in accounting software. You enter a journal weekly into the accounting software so record your sales in summary. Your accounting software is Making Tax Digital compliant. The excel spreadsheet recording your detailed sales data is part of your ‘functional compatible software – ie, it is part of your Making Tax Digital digital record keeping. Therefore, under Making Tax Digital the link between your excel sales records and your accounting software must be digital. This means that manually entering a journal, or even cutting and pasting, are not allowable means of transferring data between systems. It needs to be carried out by a digital link of some sort, which might be, for example, exporting a file and uploading it into the accounting software.
This will also be the case if you have a VAT group, and need to combine information from different businesses to complete your group VAT return.
The good news on this, is that in most cases, there is no requirement to have these digital links in place until April 2020, as the government has announced a ‘soft landing’ period for a year on this. The exception to this is if you are transferring data into other software purely to submit your VAT return, then the soft landing period does not apply.
Yes, this is still allowed under Making Tax Digital.
The partial exemption calculation is not one of the prescribed records that has to be held electronically. Therefore you will still be able to calculate your partial exemption adjustment outside the software, as long as the calculated adjustment is then posted into the ‘functional compatible software’ for inclusion in the VAT return. The challenge here will be to make sure your software can record the adjustment.
The government published draft legislation in July 2018, which confirmed there will be a points based system for penalties, with higher penalties as non-compliance ‘points’ rise. The penalty regime for non-compliance with Making Tax Digital for VAT will be implemented in April 2020, giving businesses a year of ‘soft landing’ until penalties kick in.
HMRC have confirmed that Making Tax Digital requirements for taxes other than VAT will come into effect from April 2020 at the earliest. As yet we have no more information as to which taxes, businesses or individuals may be affected next, but as soon as we do, you will see it here.
Please contact your normal Old Mill Contact who will be happy to help, or use the contact button below. If you want to read all the detail, the full HMRC publication on Making Tax Digital for VAT can be found here