HMRC’s Notice on Making Tax Digital 700/22 (https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat), sets out the digital record-keeping requirements in section 4.3. It states that for both supplies made and supplies received a digital record should be kept of:
- the time of supply – the tax point;
- the value of the supply – the net value excluding VAT, and
- the rate of VAT charged for sales or the amount of input tax that you will claim for purchases.
The Notice comments further, that the time of supply, if you are on cash accounting, is the date you receive payment or pay for the supply.
However, what is not made clear is that simply entering payments in a cashbook even in a digital form will not be sufficient. Instead, there should also be a digital record of purchase and sales invoices cross-referenced to the payments and receipts, which can be done in the cashbook and effectively the cash book will become the client’s digital record. This is not a new requirement as businesses using cash accounting have always been required to cross-reference cashbook entries to the corresponding sales and purchase invoices (see paragraph 4.3 Notice 731 Cash Accounting), and MTD has not changed this. Simply recording a payment which covers several invoices, or part-pays a single invoice is not enough as the entries must be cross-referenced to the invoices.
Additionally, for all businesses, it should be noted that supplier statements detailing multiple transactions cannot be posted as one entry. Purchase invoices must be recorded individually and retained for input tax deduction. Although it may not be directly relevant for your client, the only exception is where purchases are made via what HMRC describe as third party agents. Here Notice 700/22 confirms “where the information is received as a summary document you can treat this document as one invoice received by you for the purpose of creating your digital record”.
In theory, MTD should not change what type of records your client needs to retain, but will require those records to be maintained in a digital format. It could even be argued MTD may expose previous record-keeping deficiencies!
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