Making Tax Digital for VAT – are you ready?

Published on 15 March 2019

HMRC have recently written to all VAT registered traders to tell them about their new ‘Making Tax Digital for VAT’ (MTD for VAT) programme which is about to be introduced. In this article, we explain how the new rules work, how to claim an exemption and key dates that you need to be aware of.

Making Tax Digital for VAT – are you ready?
©shutterstock/Bloomicon

Although we can’t give advice to individuals, we are interested to hear about your experiences with MTD for VAT, especially if you are trying to claim an exemption.

What is Making Tax Digital for VAT?

Making Tax Digital for VAT is the first of HMRC’s new digital programmes which they believe will improve the standard of record keeping by many businesses and so improve the accuracy of returns they make.

There are two elements to the new Making Tax Digital for VAT rules. These are:

  1. a requirement to keep business records digitally;
  2. a requirement to file the quarterly VAT return using API (‘application programming interface’) enabled software.

Does MTD for VAT apply to me?

If you are an individual, sole trader or business (including a limited company) and you are already VAT registered, and you have VATable turnover of £85,000 or more in the 12 months ending 31 March 2019 then you come within the new MTD regime, unless you are exempt (see  below).

If your turnover is below £85,000 then you are voluntarily registered for VAT (assuming you are a UK business) and are NOT required to join the scheme.

Any individual, sole trader or business which is voluntarily registered for VAT or is exempt can still choose to join the MTD for VAT regime if they wish.

A business that must register for VAT after 1 April 2019 due to its turnover reaching the registration threshold in the previous 12 months must comply with the MTD for VAT rules as soon as they become VAT registered. 

How do I know if I am exempt?

If you are already exempt from filing your VAT returns online then you continue to be exempt from the new regime and you do not need to reapply for exemption.

Otherwise, exemption from the MTD for VAT programme is available if you meet one of three criteria:

  1. It is not ‘reasonably practicable’ for you to use digital tools to keep your business records or submit your VAT Returns because of age, disability, remoteness of location or for any other reason.
  2. You or your business are subject to an insolvency procedure.
  3. Your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.

HMRC have produced guidance on claiming exemption from MTD for VAT. If you wish to claim exemption you should read the guidance and then contact HMRC either by phone on the VAT helpline on 0300 200 3700 (textphone 0300 200 3719) or by writing to

HMRC – VAT Written Enquiries, Portcullis House, 21 India Street, Glasgow, G2 4PZ.

You must fully explain the reasons why you believe you meet one of the criteria given above and then HMRC will write to you to advise whether or not your claim has been successful. If it is not successful you may be able to appeal against the decision and the way to do this will be set out in HMRC’s response to you. You do NOT have to comply with the new MTD for VAT rules while your claim is being considered or while an appeal is being made.

If ultimately a claim for exemption is unsuccessful you must then make every effort to comply with MTD as soon as possible going forward.

If I am not exempt when do I have to comply with MTD for VAT?

The new regime begins on 1 April 2019, however the exact date from which you must be MTD for VAT compliant depends on what your VAT periods are:

If your next VAT quarter end date is 31 March 2019, or you file monthly, you must comply with MTD from 1 April 2019.

If your next VAT quarter end date is 30 April 2019 you must comply with MTD from 1 May 2019.

If your next VAT quarter end date is 31 May 2019 you must comply with MTD from 1 June 2019.

If you become VAT registered after 1 April 2019 due to reaching the turnover limit, you must comply with MTD from your registration date.

However there is a small group of businesses who do not have to join the MTD for VAT programme until 1 October 2019 at the earliest and they are listed on GOV.UK. The list includes businesses who complete annual VAT returns. HMRC have written to all businesses who must join MTD for VAT on or after 1 October 2019. If you think you are within one of the groups but have not had a letter confirming this from HMRC you should contact the VAT helpline.

What do I have to do to comply with MTD?

As mentioned above, there are two elements to the new MTD rules. These are:

  1. a requirement to keep business records digitally;
  2. a requirement to file the quarterly VAT return using API (‘application programming interface’) enabled software.

What are digital business records?

Under MTDl for VAT, the records you are required to keep to support your VAT returns must be kept digitally in what is known as ‘functional compatible software’. This will usually be either an accounting software package of some kind or a spreadsheet package. Certain data from business invoices and receipts must be recorded digitally but the invoices and receipts themselves do not need to be scanned and saved digitally, although they can be retained in this way. For more information on the data that must be retained digitally in functional compatible software, see HMRC’s guidance.

There is information on GOV.UK to help you choose accounting software or bridging software, including a tool which will help you narrow down the products that may be suitable for you. This is fairly basic at the moment but HMRC are working to improve the filter options within the tool.

How do I file my VAT return once I am in MTD for VAT?

Once you are within the MTD for VAT regime, you must NOT submit a VAT return using HMRC’s existing portal as it will not constitute a valid return.

Instead, the ‘functional compatible software’ must be used to file the VAT return with HMRC. Most accounting packages will have this functionality built in. However if you use spreadsheets this will not be the case, and therefore you will need to purchase bridging software which will link your spreadsheet to HMRC’s systems and allow the VAT return to be filed. In these circumstances, the combination of the spreadsheet and the bridging software will constitute the ‘functional compatible software’.

Please note that the way VAT is calculated is NOT changing and so your VAT payments/refunds will continue to be worked out in the same way.

How do I know what software to buy?

There is information on GOV.UK to help you choose accounting software or bridging software, including a tool which will help you narrow down the products that may be suitable for you. This is fairly basic at the moment but HMRC are planning to improve the filter options within the tool.

HMRC have NOT developed any software that is MTD compliant and so commercial software must be purchased to be able to comply with MTD for VAT obligations. The cost of the software packages varies between suppliers. Some suppliers offer free products but this may only be for a limited time or may only be for the simplest version of their product. Therefore you must be careful when reviewing potential software products to try to ensure you get the most suitable product for your circumstances.

How do I join MTD for VAT?

There is a sign up process that you must follow to register for MTD for VAT. However you should NOT sign up until you have filed your last VAT return under the old rules via the HMRC portal. If you pay by direct debit, you should not sign up until at least 6 working days after filing your last VAT return under the old rules, otherwise there may be a risk that the payment may not be processed correctly.

The various steps that need to be followed to complete the sign up process are set out on GOV.UK.

It is important to sign up at the right time as once you join the MTD for VAT programme you must stay in the regime even if your turnover drops below the VAT registration limit unless you decide to cancel your VAT registration.

If I am exempt how do I file my VAT returns?

If HMRC agree you are exempt from MTD for VAT then you must continue to file your VAT returns as you have been doing in the past.

What will happen if I don’t register for MTD for VAT when I should?

HMRC have stated that there will be what is known as a ‘soft landing’ of the MTD for VAT programme. This means that if you have tried hard to comply with the new MTD for VAT rules and can show you have made a genuine effort to do so, but have slipped up somewhere along the line then it is unlikely you will be penalised. However if you have made little or no effort to meet the new requirements then it is more likely that you may be charged penalties in due course. However the ‘soft landing’ approach will only be applied to the MTD for VAT aspects of the VAT process, so this means the digital record keeping and digital filing requirements and it will NOT be applied if a VAT payment is not made on time. Therefore even if you are struggling to file your VAT return under the new regime, you should still ensure you pay any VAT due at the correct time to avoid possible penalties.

(15-03-2019)

Contact: Sharron West (please use our Contact Us form) or follow us on Twitter: @LITRGNews