Making Tax Digital for VAT: The Essentials

Making Tax Digital (MTD) is a government initiative to modernise HMRC’s tax system, with the aim of making the whole process of administrating tax simpler and more efficient.

All of an individual’s or entity’s tax information will be in one place (the digital account) and tax will be paid based on business activity during the year.  It will be possible to upload and update the tax account in real time.

MTD starts with MTD for VAT.  In other words, only businesses above the VAT threshold limit (currently £85,000) will be in MTD.  The first VAT period to which MTD applies will be the one commencing on or after 1 April 2019. In other words, MTD for VAT has already started for most businesses who in the next quarter will be submitting their first VAT return under the new system.

Those affected will be required to keep digital records for VAT purposes.  By 2020 it is most likely all other businesses will have to comply.

MTD mythbusters

Now that MTD for VAT is here, it is first worth demystifying some of the common misconceptions with our myth-buster infographic below.

Who is within scope of MTD for VAT?

Essentially, it is only VAT registered businesses with a VAT taxable turnover over £85,000 per annum which are presently within MTD for VAT.

VAT registered entities

All entities with a VAT taxable turnover above the VAT threshold, currently £85,000 per annum, will come within the requirements of MTD for VAT from the first VAT period starting on or after 1 April 2019.  This includes sole traders, partnerships, companies, limited liability partnerships (LLPs), groups and charities, trusts and non-UK businesses who are registered for UK VAT.

Voluntary VAT registered entities

Entities who have voluntarily registered for VAT with current turnover below the VAT threshold of £85,000 per annum, will not be required to keep digital accounting records or to file VAT returns using MTD compliant software until 2020 or later.  The current online VAT return will not meet the MTD requirements but will continue to be available until at least Spring 2020.

Non VAT registered entities

MTD for VAT starts in April 2019 and will only become relevant to businesses if they subsequently become VAT registered. 

Non UK taxable persons

Non-UK businesses registered for UK VAT with turnover above the VAT threshold (currently £85,000 per annum) will come within the requirements of MTD for VAT from the first VAT period starting on or after 1 April 2019. 

Becoming VAT registered under MTD for VAT

For non VAT registered entities, it is essential to monitor the annual turnover as:

• if past sales for the previous twelve months increase to above £85,000 by the end of a month, or
• expected sales for the coming month exceed £85,000

it will be necessary to register for VAT and comply with the MTD for VAT rules.

Exemptions from MTD for VAT

HMRC expect that most businesses and individuals will be able to meet the legal obligations of MTD but accept that a small number may not be able to do so.

It will not be necessary to follow the rules for MTD if HMRC is satisfied that either:

• It is not practicable to use the digital tools to keep business records or submit VAT returns because of age, disability, remoteness of location or for any other reason.
• The individual or business is subject to an insolvency procedure.
• The 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.

Currently held exemptions for VAT online filing will be carried over under MTD for VAT.

As will be appreciated, the exemptions will not apply to many entities registered for VAT.

Important dates and deadlines

Entities registered for VAT with turnover above the VAT threshold (currently £85,000 per annum) will be required to keep digital accounting records and to file VAT returns using MTD compliant software from April 2019. 

The first VAT period starting on or after 1 April 2019 will be filed under MTD for VAT and the current online VAT return will no longer be available.

Businesses need to sign up for Making Tax Digital at least one week before their VAT return is due.

The first VAT quarter under MTD for VAT is therefore staggered as follows:

Businesses will be required to keep digital accounting records from the following dates:

The deadline for the first MTD for VAT Return, with electronic payment of VAT due, will be:

Six month deferral to October 2019

A six month deferral to October 2019 is available for the following businesses:

• Trusts
• ‘Not for Profit’ organisations that are not companies (this includes some charities)
• VAT divisions
• VAT groups
• Public sector entities that are required to provide additional information alongside their VAT return
• Local authorities and public corporations
• Traders based overseas
• Those required to make payments on account
• Annual accounting scheme users.

Businesses relying on the deferral need a formal notification letter from HMRC.

Are your systems compliant?

The MTD changes are potentially so fundamental that it is necessary to review your current record keeping systems and to reconsider what work you decide to do yourself and which activities you wish to outsource, in order to ensure compliance

There is however a very simple antidote to the complexities of MTD for VAT and this is for businesses to use compliant accounting software.  In many cases, this will be best achieved using Cloud Accounting Software. If you’d like to know more about this, please get in touch.