The government revealed some ambitious plans a few years ago to go digital across all taxes. The original expectation had been that, by now, sole traders, partnerships and limited companies would all be filing their income, expenditure and VAT (if applicable) once a quarter, via software that provides HMRC with real-time information on income and taxes. This proposal was called ‘Making Tax Digital’ and things didn’t go quite according to the original plan.
Things moved along a lot slower than originally anticipated and, in the end, we had a soft landing for Making Tax Digital for VAT in April 2019.
What are the current requirements?
Currently, a VAT-registered business trading above the VAT registration threshold (£85,000 at time of writing) is required to sign up to MTD for VAT, which means it’s required to send its VAT returns in some digital form (see below for what counts as digital).
The only ‘get-out’ for a business trading above the VAT threshold is that you don’t use technology on religious grounds or because of age, disability or remoteness of location.
If you’re voluntarily registered for VAT and trading below the registration threshold, then you’re not obliged to sign up for MTD for VAT; but you can if you want to.
Once you’ve signed up, you’re in for good and the only way you can get out of MTD for VAT is by de-registering for VAT altogether. This would be a permanent decision to no longer be VAT registered, for example, if trading has reduced and you don’t want/need to be VAT registered anymore.
What counts as ‘digital’ for VAT filing?
Digital VAT filing requires some form of software intervention in the VAT filing process. You used to be able to log on to HMRC’s online VAT services and key in your VAT return figures. You can’t do that anymore.
The type of software you use can be an all-singing, all-dancing accounting software package – we really like Xero for example, but there are others available. Or it can be what’s called ‘bridging software’, which essentially bridges the gap between an excel spreadsheet and HMRC’s digital platform. In our office, for our clients who still maintain Excel records, we’ve chosen to use Absolute Excel VAT filer, which seems cost-effective and reliable.
HMRC provides a list of compatible software on gov.uk.
As a small business, what are the advantages of Making Tax Digital for VAT?
Small business owners often find it a challenge and a hassle transitioning to a new way of doing things. Any change in a business requires some planning and a bit of forethought.
As a result of the change, we’ve found that software for VAT filing has actually, on the whole, improved with additional capabilities that weren’t there before. This is because the software now has to handle a lot more than what people could previously get away with manually. In the past, software houses didn’t need to ensure the software could handle certain situations – whereas now they do. Overall, we see this as an upside for the small business owner because the software is now better than it used to be.
Filing the VAT return digitally should reduce the risk of human error and the time it takes to file the return. For example, under MTD for VAT, you’re no longer allowed to key in your VAT return figures onto the HMRC website. Instead, once you’re happy the VAT return is complete, it’s filed at the click of a button via the software (obviously you don’t hit that button until you’re happy the VAT return is complete and accurate.)
Should I be bothered about MTD for VAT?
If you’ve nothing to hide, then there’s no reason that filing VAT returns under Making Tax Digital should bother you.
As HMRC and software providers develop the connections further, there will be a requirement for more detailed information to be sent over to HMRC. Clearly this is with the intention that HMRC will be able to undertake a more informed analysis of filed returns and identify anomalies or unusual claims from the comfort of their desks using all sorts of fancy algorithms. But if you maintain good records and prepare your VAT return honestly, then there’s no reason to worry about or be scared of MTD for VAT.
What information goes to HMRC when I file my MTD VAT return?
The 12-month soft landing, which had originally been due to end in April 2020 (not unexpectedly, this has now been extended to April 2021 in view of the COVID-19 pandemic) meant that, initially, only top-level information on the VAT return went to HMRC. So essentially, it was just a digital way of sharing the same basic information that was always reported when someone keyed in their VAT return.
As the technology progresses, and as businesses become more used to MTD for VAT, increased levels of data will be shared with HMRC and the requirements of what level of detail must be maintained in accounting software will change.
At present, the requirement to keep digital records does not mean that businesses have to scan and store invoices/receipts electronically. The ambition of HMRC and many software houses is for businesses/individuals to keep records in as near to real time as possible. However, at present and for the foreseeable future, it is still possible to create the digital records at periodic intervals; for example, write up the books every three months for the VAT return using the assistance of a bookkeeper or agent if needed.
What are the penalties if I don’t file using MTD for VAT?
Again, the soft landing has meant a fairly relaxed approach from HMRC with regards to issuing penalties for non-compliance with MTD VAT. HMRC currently has the power to charge a penalty of up to £400 for filing a VAT return other than electronically (paper VAT returns were abolished years ago unless you had religious grounds).
This power will be extended to the obligation to file VAT returns using compatible software (MTD VAT) but where the trader has made reasonable efforts to apply, it’s quite likely that in this ‘soft landing’ phase, no penalty will be levied.
When will Making Tax Digital apply for corporation tax and/or income tax?
At present there’s no detailed timetable set out and no firm legislation on when this might come about. It remains an ambition of HMRC and the Government, and we anticipate that, in time, it will happen.