Making Tax Digital changes from April 2021 will make the digital record-keeping requirement compulsory for all VAT periods beginning on or after 1 April 2021.
These obligations were due to be implemented on 1 April 2020 but they were postponed by the Covid-19 pandemic. For the first time, the obligations are accompanied by the threat of penalties.
Who is affected by these changes?
VAT-registered businesses, individuals and charities with a taxable turnover above the VAT registration threshold (£85,000) are required to follow the Making Tax Digital changes from April 2021 by keeping digital records and using compatible software to submit their VAT returns.
Where taxable turnover is below the VAT threshold they can voluntarily join the MTD service now but from April 2022 all VAT returns will need to be completed and submitted using compatible MTD software.
What are the new rules?
Under the Making Tax Digital changes from April 2021, UK VAT registered businesses with turnover above the VAT registration threshold must keep and maintain VAT records digitally in ‘a compatible software package that allows you to keep digital records and submit VAT Returns’ or use ‘bridging software to connect non-compatible software (like spreadsheets) to HMRC systems’.
This digital record-keeping requirement is compulsory for all VAT periods beginning on or after 1 April 2021.
Records included under this requirement include sales and purchase invoices with VAT. Accounting records not specific to VAT return requirements are not included.
The data that must be stored digitally includes:
- – your business name, address and VAT registration number;
- – the VAT accounting schemes you use;
- – VAT on goods and services you supply (everything you sell, lease, transfer or hire out);
- – VAT on goods and services you receive (everything you buy, lease, rent or hire);
- – any adjustments you make on a VAT return;
- – the ‘time of supply’ and ‘value of supply’ for everything you buy and sell;
- – the rate of VAT charged on goods and services you supply;
- – reverse-charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy;
- – total daily gross takings if you use a retail scheme;
- – items you can recover VAT on if you use the Flat Rate Scheme; and
- – total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme.
If more than one software package is used the packages need to be linked digitally. The links can involve:
- – using formulas to link cells in spreadsheets;
- – emailing records;
- – putting records on a portable device to give to an agent;
- – importing and exporting XML and CSV files and
- – downloading and uploading files
Digital should not involve:
- – ‘cut and paste’ manual adjustments to move data, and
- – any manual adjustments and consolidations of group returns in spreadsheets
Making Tax Digital changes from April 2021 – In practice
HMRC has recognised that there are circumstances during the preparation of a VAT return when calculations have to be made outside software or there is a need to enter data into software from other sources. It, therefore, continues to allow the use of manual calculations for special VAT schemes including the partial exemption and capital goods scheme calculations.
The digital links between the software packages need to be in place before the business’s first full VAT period after 1 April 2021. However, HMRC has offered an extension to the 1 April 2021 deadline if there is no solution to IT issues and the operation of an uninterrupted ‘digital journey’.
Anyone wanting an extension must apply to HMRC as soon as possible and provide the following information:
- – an IT map of the current accounting software showing where the digital journey fails, why it is ‘unachievable and not reasonable’ at this time to export data via digital links.
- – reasons why the business is unable to meet the 1 April deadline.
- – an action plan, with IT confirmation and timetable, to resolve the matter. This cannot take longer than 1 April 2022.
- – details of controls that ensure that any manual data transfer will be performed without errors.
HMRC has made it clear that cost alone will not be an acceptable reason for an extension to be granted.
Further details are available here.
Making Tax Digital Penalties
From 1 April 2021, HMRC is introducing a penalty system for failing to meet MTD obligations. These penalties, or surcharges, will apply to the first completed VAT return on or after this date.
The penalties will be applied as follows:
- – a default is recorded for a failure to observe the Making Tax Digital (MTD) rules or missing a filing. In this case, a surcharge period lasting 12 months applies.
- – if there is another failure a surcharge % applies to the VAT due on the latest return.
- – if there are additional failures within 12 months a point system applies.
The points result in % surcharges, starting at 2% and increasing to 15%, for each accumulated failure.
There will also be fines and interest charges if there are errors in the VAT return. Fines maybe 100% of the VAT due or over-claimed if returns include careless or deliberate inaccuracies or 30% if the taxpayer does not inform HMRC that their assessment is too low. Interest will be charged at 3% of the VAT due.
HMRC’s XML channel will be deactivated
Before the Making Tax Digital changes from April 2021 were introduced some software used XML to file VAT returns with HMRC. We understand that HMRC’s XML channel will be deactivated from 1 April 2021.
From this date, VAT returns can no longer be filed using XML enabled software. From April 2022, all VAT returns will need to be completed and submitted by using Making Tax Digital (MTD).
Contact MCL Accountants on 01702 593 029 to optimise your tax position or if you need any assistance with the Making Tax Digital changes from April 2021 to prepare & submit compliant VAT returns to HMRC.Tags: Making Tax Digital, VAT