The first major step towards the Government’s aim of transforming the way tax data is stored and communicated comes in April 2019 when most limited companies will be required to submit all VAT returns electronically.
MTD for VAT – which companies are affected?
If your limited company is VAT-registered, with a taxable turnover above the prevailing VAT threshold (currently £85,000), then you are included.
All UK-based businesses who are VAT-registered, and turn over £85,000 or more must comply with the new rules; sole traders, partnerships and LLPs, as well as private limited companies.
A very small percentage of businesses will be able to defer entry into the new system for 6 months, such as trusts and charities. This is very unlikely to cover any contracting businesses.
What do I have to do from 1st April onwards?
Firstly, your company will need to store all of its VAT-related records digitally. Although you may still maintain paper invoices, the data from these invoices must be recorded digitally.
Secondly, your company must use HMRC-approved software to transmit its quarterly returns to the taxman for quarters beginning on or after 1st April 2019. The software must be able to communicate with HMRC’s API platform.
This means that you will either need to submit your VAT returns yourself (via online software), or appoint your accountant to do this on your behalf if you’re not able to.
If you store your VAT records on a spreadsheet, this either needs to be digitally linked to software which can communicate with the HMRC API, or form part of the same software which submits your VAT returns to HMRC.
If you email your accountant your VAT records, this is an acceptable digital link, if your data is then uploaded into API-compatible software at your accountant’s office, for example.
For the first 12 months, HMRC says it will not enforce the digitial link requirement, to give firms a chance to get used to the new rules, and to put compliant systems in place.
Do you have compatible accounting software?
If, like a large number of contractor companies, you already use well-known online accountancy software such as FreeAgent, Xero and Clear Books you don’t have to do anything – aside from making sure you maintain accurate records (as detailed below), and submitting your quarterly returns via the software interface before each deadline.
You can access a list of MTD-compatible and HMRC-approved software providers here.
If you don’t have access to MTD-ready software, or if you’re unsure, make sure you ask your accountant right away.
What VAT records must my company keep digitally?
You can browse a detailed list of the data you need to store in VAT Notice 700/22 – section 3.3 (see below).
However, here is the headline data you’ll need to capture.
- Designatory data – about your company, your VAT registration number, etc.
- Supplies made – the tax point, the net amount, and the VAT amount charged on each transaction.
- Supplies received – the tax point, the net amount, and the VAT amount reclaimed on each transaction.
How does this affect the Flat Rate VAT scheme?
If your company is on the Flat Rate VAT scheme:
- you don’t need to keep a digital record of your purchases unless they are capital expenditure goods on which input tax can be claimed.
- you don’t need to keep a digital record of the relevant goods used to determine if you need to apply the limited cost business rate.
What happens next?
Since it first announced the Making Tax Digital (MTD) initiative in 2017, the Government has been forced to scale back its early ambitions, which is hardly surprising given the complexity of the UK’s tax system.
Plans to digitise taxes such as Corporation Tax and Income Tax are unlikely to begin until at least 2020.
For a complete guide to MTD for VAT, read VAT Notice 700/22