VQOTW: Requirements for keeping VAT Records under Making Tax Digital
Regarding Making Tax Digital, what is meant by functional compatible software? If my turnover is below £85000, when will I be expected to submit my vat returns digitally?

This has become an increasingly common question of late and HMRC did confirm in November 2020 that VAT-registered businesses with a taxable turnover below £85,000 will be required to follow Making Tax digital rules from their first return starting on or after 1 April 2022.

This can appear to be a daunting task for small businesses where time and money is always at a premium but hopefully, I can summarise the main points to make it less daunting than it appears.
Essentially, Making Tax Digital (MTD) is keeping digital records and using compatible software to submit VAT returns. It is a legal requirement following the Finance (No.2) Act 2017 with the secondary legislation in The Value Added Tax (Amendment) Regulations 2018 (SI 2018 No. 261). The rules and information are all contained in HMRC’s VAT Notice 700/22: Making Tax Digital for VAT.

Firstly, HMRC specify the records you need to keep digitally as –

  • your business name, address and VAT registration number
  • any VAT accounting schemes you use
  • the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
  • the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
  • any adjustments you make to a return
  • the ‘time of supply’ and ‘value of supply’ (value excluding VAT) 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
  • your total daily gross takings if you use a retail scheme
  • items you can reclaim VAT on if you use the Flat Rate Scheme
  • your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme

All your transactions must be added to the digital records, but you do not need to scan paper records like invoices or receipts.
A business will need to ensure the accounting package or other software maintains the records required, collates and prepares the vat returns, and, in order to submit the returns, can communicate with HMRC digitally through the Application Programming Interface (API) platform. This may require new software or at the very least bridging software to connect and communicate with HMRC systems – this HMRC link will allow you to check your software or find a compatible product –

Find software that’s compatible with Making Tax Digital for VAT – GOV.UK (www.gov.uk)

If you use more than one software package or maintain records using spreadsheets for example, then you will need to link them. Some ways you can link your software include:

  • using formulas to link cells in spreadsheets – for example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.
  • emailing records – emailing a spreadsheet containing digital records, so the information can be imported into another software product
  • putting records on a portable device to give to your agent – for example, a memory stick and physically giving this to someone else, who then imports the data into their software
  • importing and exporting XML and CSV files
  • downloading and uploading files

This list is not exhaustive, and more details can be found in Notice 700/22 section 4.2.1 –

VAT Notice 700/22: Making Tax Digital for VAT – GOV.UK (www.gov.uk)

What you cannot do is use ‘cut and paste’ or ‘copy and paste’ to select and move information, as a digital link. In addition, you cannot manually transfer data within or between software programs, products or applications. For example, you must not note down details from an invoice in a ledger, then use that handwritten information to manually update another part of the business functional compatible software system. It must be done using a digital link.

HMRC realise there will be some businesses for which it is not practical to use digital tools to keep business records or submit VAT Returns – this may be due to reasons such as age, disability or location (for example, if you cannot get internet access at your home or business premises, or a disability means you cannot use a computer, tablet or smartphone). If this is the case, then you can ask HMRC for an exemption from MTD and follow the guidance in Section 3.4 of Notice 700/22.

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VAT Adviser

David has worked in a variety of compliance roles for HMRC for over 30 years prior to joining Croner Taxwise.  He began his career as a VAT Compliance Officer before moving as a Computer Audit Officer to Large Business where he was responsible for VAT audits at some of the largest companies in the UK.  Since then, he has worked as VAT Consultant specialising in Alcohol and Missing Trader fraud.

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