HMRC have published a new draft VAT Notice 700/21 giving guidance on what records must be kept digitally within functional compatible software in order to comply with the requirements of MTD. Any records not listed in the new notice do not have to be kept in any specific way. Andrew, Needham, author of Bloomsbury Professional’s VAT Annual and contributor to our online current awareness service, looks at this new draft notice.
By mandating digital record-keeping and filing, the government expects to reduce the amount of tax lost through error and failure to take reasonable care. MTD will affect businesses with a turnover of more than £85,000 p.a. from 1 April 2019. Businesses that are VAT registered but have a turnover of less than £85,000 p.a. will not be required to participate in MTD but can do so voluntarily.
Under MTD for VAT, functionally compatible software will have to be used to maintain the mandatory digital records, calculate the return and submit it to HMRC via an Application Programme Interface or ‘API’ for short. HMRC has a list of software that can be used to submit VAT returns.
The complete set of digital records to meet MTD requirements do not all have to be in one piece of software. If there is a digital link between the pieces of software, records can be kept in a range of compatible digital formats.
The requirement to submit returns digitally will oblige an upgrade of accounting systems. However, thousands of micro-businesses maintain their accounting transactions in a spreadsheet – with no accounting package. HMRC will require such businesses to buy or build an automated API access between these spreadsheets and HMRC systems. The same requirement will apply to larger businesses which first consolidate in a spreadsheet their group VAT transactions before manually entering it in the HMRC VAT Portal.
Functional compatible software is a software program or set of compatible software programs that must be able to — • record and preserve electronic records in an electronic form;
• provide to HMRC information and returns from the electronic records in an electronic form and by using the API platform; and
• receive information from HMRC.
Business must keep the following information digitally:
• business name;
• the address of the principle place of business;
• VAT registration number; and
• a record of any VAT accounting schemes used.
For each supply made the business must record:
• the time of supply;
• the value of the supply; and
• the rate of VAT charged.
For each purchase received the business must record:
• the time of supply;
• the value of the supply including any VAT that is not claimable; and
• the amount of input tax claimed.
To show the link between the output tax in business records and the output tax on the return, the business must have a record of:
• the output tax owed on sales;
• the output tax owed on acquisitions from other EU member states;
• the tax due under the reverse charge procedure;
• the tax that needs to be paid following a correction or error adjustment; and
• any other adjustment required by VAT rules.
To show the link between the input tax in the business records and the input tax on the return the business must have a record of:
• the input tax claimable on business purchases;
• the input tax allowable on acquisitions from other EU member states;
• the tax reclaimable following a correction or error adjustment; and
• any other necessary adjustment.
Adjustments, such as partial exemption, can be calculated separately outside the digital records of the organisation and transferred in digitally or manually.
HMRC anticipates that there will be a soft-landing period (without application of record-keeping penalties) in the first year to allow businesses, in certain circumstances, extra time to update legacy systems to be fully compliant.
HMRC give a number of examples of sets of software with digital links that meet the requirements of MTD, including the following:
A business uses one piece of accounting software to record all sales and purchases and transfers the totals into a spreadsheet that it uses to calculate the return. The information is then sent to a piece of bridging software which submits the return to HMRC.
Altogether the three pieces of software maintain the mandatory digital records, calculate the return and submit it to HMRC. The links between the three pieces of software must be digital for the set of software to be functional compatible software.
A business uses one piece of accounting software to record all sales and purchases, this software then calculates the return and submits it to HMRC. As well as the records in the accounting software the business uses a spreadsheet to keep track of fleet of cars and work out its road fuel scale charges.
As the records in the spreadsheet are not listed in by HMRC the business can type the adjustment into its accounting software. However, a digital link will reduce the chance of errors.
A VAT group uses three different software packages to record the mandatory records for different parts of the group. Each piece of software calculates the amounts needed for the return from each part of the group. A spreadsheet is used to compile the totals and create the return for the whole of the group. The information is then sent to a piece of bridging software, which submits the return to HMRC.
Altogether the five pieces of software maintain the mandatory digital records, calculate the return and submit it to HMRC. The links between the five pieces of software must be digital for the set of software to be functional compatible software.
Businesses may authorise their agent to submit their VAT return for them under MTD. To do this the agent must have access to the functional compatible software that holds the businesses mandatory records.
Businesses can also make voluntary updates of information ahead of submitting their VAT returns. The businesses software will also allow it to submit supplementary data to HMRC. Businesses can only do this when they send a VAT return or a voluntary update. If the business decides to send supplementary data its software will send additional information to HMRC.
Submission of this supplementary data is entirely voluntary. Businesses can send this each time they submit VAT information to HMRC or they can do this on an occasional basis. If a businesses is selected for a tax compliance check HMRC will look at this information before contacting them. If this information is enough to give HMRC assurance that the return is correct they may not contact the business and inspection could be avoided. If an error is made in submitting supplementary data it can be corrected and submitted again. Businesses cannot receive a penalty for submitting an error in supplementary information
Andrew is VAT adviser to the Forum of Private Business and represents them quarterly on the Joint VAT Consultative Committee. He is a specialist in international tax, land and property issues and also a lecturer on VAT issues. Andrew is author of Bloomsbury Professional Value Added Tax (previously Tottel's Value Added Tax).