Guides: Making Tax Digital for Business (MTDfB) – A survival guide
On the 1st April 2019 the Government will be implementing its landmark Making Tax Digital (MTD) regime, which will provide digital efficiency to the UK tax system and be an easier process for businesses and individual tax payers to maintain their accounting and tax records. With an aim to be the most digitally-advanced in the world, Making Tax Digital for Business (MTDfB) and VAT reporting is the first area to be transformed and will see VAT-registered businesses complete the tax return process digitally from end-to-end.
Which businesses are affected?
Whether you are a limited company, landlord or sole trader; once the business is VAT-registered and turnover is above the current VAT registration threshold of £85,000; frozen until 1 April 2020, MTDfB is compulsory.
From the start of their first VAT return period or after 1 April 2019, VAT-registered businesses with turnover above the threshold will need to comply with the digital record-keeping and reporting requirements of MTD for VAT.
For now, VAT-registered businesses whose turnover is below the VAT registration threshold will be able to choose whether to join MTD for VAT. However once within the scheme, a business must remain in it while they are VAT-registered, even if their turnover falls below the VAT registration threshold.
Where turnover is above the VAT-registration threshold on 1 April 2019, the start date will depend on how the VAT quarters fall. Companies who have not opted in and have a turnover below the VAT-registration threshold should check its turnover at the end of each month.
If in the previous 12 months it’s more than the VAT-registration threshold applying on the first day of the following month, it should start to apply the MTD for VAT rules from the start of its next VAT accounting period.
Am I exempt from MTDfB?
The Government have included a few exemptions within the legislation, these include the following:
- Religious societies – Businesses run entirely by practicing members of a religious society, whose beliefs are incompatible with the requirements of MTD for VAT. This could be where their beliefs prevent them from using computers.
- Non-practical – An exemption may apply where it’s not reasonably practical to use digital tools to keep business records or to submit returns for reasons of age, disability, remoteness of location or for any other reason.
- Insolvency – If an insolvency procedure is in place, an exemption from MTD for VAT may be granted.
With all exemptions you will need to satisfy HMRC requirements before they will agree to the exemption.
Getting ready to go digital
To comply with HMRC’s new system, businesses must buy software from a list of verified companies which HMRC has identified to be compatible with its own systems and start using it to log their bills. The cornerstone of MTD for VAT, this software will be used to record and preserve records in an electronic form, calculate the return, submit it to HMRC via an application programme interface (API) and receive information from HMRC.
Using compatible software is a legal requirement however it is possible to mix and match more than one software solution, providing there is a link between the different pieces of software and the records can be held in a range of acceptable digital formats.
What is a digital record and what do I need to keep track of?
Under the new system rules certain digital records must be kept digitally and be preserved for up to six years. These include:
- Designatory data: A digital record of your business’ name and an address (the principal place of business). Your business’ VAT-registration number and a record of any accounting schemes used.
- Supplies made: For each supply made by your business, you must record the time it was supplied, how much it was worth at the time and the rate of VAT charged. Remember, multiple supplies made at the same time don’t need to be recorded separately.
The total value of supplies on each invoice or receipt that have the same time of supply and rate of VAT can be recorded. A record must also be kept of output values for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.
- Supplies received: For each supply, your business receives, you need to record the time of supply, the value of supply (including any VAT that cannot be reclaimed), and the amount of input tax to be claimed.
If there is more than one supply on an invoice, the totals from the invoice can be recorded.
- The VAT account: This is the link between the digital VAT records and the VAT return submitted to HMRC. Under MTD for VAT, the information which must be held in the VAT account must be maintained digitally and this is referred to as the ‘electronic account’.
To demonstrate a link between the output tax in the business records and the output tax on the VAT return, the electronic account must contain a record of:
- output tax owed on sales
- output tax owed on acquisitions from other EU member states
- any tax to be paid on a supplier’s behalf under a reverse charge procedure
- any tax owed following a correction or error adjustment
- any other adjustment required by the VAT rules
Similarly, to demonstrate the link between the input tax in the business records and the input tax on the VAT return, the electronic account must contain a record of:
- input tax which can be claimed on business purchases
- input tax allowable on acquisitions from other EU member states
- tax that can be reclaimed following a correction or error adjustment
- any other necessary adjustment.
Where adjustments are required, only the total value for each type of adjustment will need to be kept digitally. Even though calculations can be completed manually or using spreadsheets, using digital software should reduce the risk of errors. The electronic account is vital as the information held in it is used to calculate and complete the VAT return, businesses will need to confirm the return is correct before sending it to HMRC.
How can we help?
Whether large or small, MTDfB will affect your business sooner or later – so it pays to be prepared. Our team of dedicated Accountants are working with several businesses helping them get everything running ahead of the April 2019 start date. If you require more information or would like to discuss how MTDfB will affect you, please contact Accounts Manager Katie Baker directly.