What is Making Tax Digital for VAT?
Making Tax Digital (MTD) for VAT is the first step of a multi-year programme by HMRC to have businesses maintain digital records of transactions and to electronically report taxes to HMRC. In the future, HMRC will expand MTD to include corporation tax and self assessments, but we will focus on VAT reporting in this article as this is the first stage of MTD.
Almost all the rules for VAT will remain unchanged. The main changes are that VAT transactions will have to be maintained digitally and special software with an API (application programming interface) link to HMRC will need to be used for reporting VAT returns.
Using digital records for VAT transactions simply means that manual records can no longer be used; therefore, ledgers maintained on paper or actual physical books are no longer allowed for VAT purposes.
At iFinance Department, we have resolved this issue by using Xero accounting software, which is a cloud accounting system. That means that not only can we access it anywhere, but you can too so you are able to see your financial position at any time!
File VAT returns using software
The government gateway will no longer be used for filing VAT returns. Instead, businesses will need to use software with an API link to HMRC. There are a couple ways of doing this.
- If you maintain your books in a spreadsheet, or your accounting system does not have an API link to HMRC, and you want to continue using your current accounting system, then you will need to use bridging software. Bridging software is special software with the sole purpose of sending your VAT return to HMRC; however, you need to use a digital link to get your data from your accounting system into the bridging software. You cannot enter it manually.
- You can use an accounting system that already has an API link to HMRC.
Xero is an HMRC approved software solution for sending VAT returns electronically. Therefore, once the VAT return is ready, it can simply be transferred directly to HMRC. The API link only sends the 9 boxes of information to HMRC. It does not send the actual transactions. Also, you are in control, it only sends the data when you choose to send it. HMRC cannot access your data. VAT Notice 700/22 provides detailed guidance on MTD for VAT if you want further information.
Will Making Tax Digital for VAT affect me?
If your business is VAT registered with an annual turnover above £85,000, you will be required to follow the Making Tax Digital for VAT rules. Otherwise, you will not be required to follow MTD, but may choose to register for MTD.
Additionally, you may not be required to register for religious reasons, if your business is going through insolvency procedures, or it is not reasonably practicable to do so. If you feel your business fits one of these categories, refer to VAT notice 700/22 for more details.
When do I need to register?
Making Tax Digital for VAT comes into force in April 2019. You will need to register before your first VAT period beginning on or after 1 April 2019. Following is the timeline of what needs to be done based on VAT periods:
- January to March – Register in March, start keeping electronic records in April, and report using API enabled software for your April to June VAT period.
- February to April – Register before May, and follow MTD for your May to July VAT period.
- March to May – Register before June, and follow MTD for your June to August VAT period.
Can I get help?
Of course! iFinance Department would be happy to help. We can use your current accounting system if it is Making Tax Digital for VAT compliant. If it is not, we are Xero conversion certified and can help get you setup on Xero to be fully compliant with MTD.