When will Making Tax Digital happen and whom might it affect?
The Government made no announcement in the Budget on 29th October 2018 concerning Making Tax Digital for VAT. Whilst HMRC have still not confirmed the details which were due to be announced by the end of October, we can only assume that they will confirm shortly that MTD for VAT will be starting from 1st April 2019, despite representations being made to them that they are proceeding a little too quickly.
MTD for VAT will affect anyone in business who is registered for VAT and has sales for VAT purposes above £85,000. Anyone with sales below this figure, whether they are registered for VAT or not will be unaffected at 1st April. In subsequent years it may be announced that all VAT registered businesses will be affected, but we will monitor the situation and keep our clients informed.
Looking further ahead HMRC have indicated that Making Tax Digital for Income Tax (applicable to sole traders and partnerships, and those with rental income, but not Limited companies) may start from 1st April 2020 but this may well be dependent upon the success of MTD for VAT in its first year. Limited companies may be affected at some point beyond 2020.
HMRC have said that they will start to issue letters to relevant VAT registered businesses during November and apparently these letters will include comments recommending that you talk to your accountant about this!
Who will it affect and when?
MTD for VAT will be starting from 1st April 2019 and will initially affect anyone in business who is registered for VAT and has sales for VAT purposes above £85,000. (This excludes sales which are VAT exempt sales). In subsequent years it may be announced that all VAT registered businesses will be affected, but we will monitor the situation and keep you informed.
What will be required?
HMRC will be changing their VAT portal where VAT return information is captured on their system. This is all part of their digital process to (apparently) provide better information and to enable them to collect the right amount of tax with fewer errors.
So instead of perhaps logging on to their website and entering details on their system manually based on your VAT workings, HMRC will require those same figures to be transmitted directly from either bookkeeping software or from suitable Excel spreadsheets linked to a specific Application Programming Interface ( API) or Bridging Software.
The intention is that the figures are produced from digital records (which can include Excel spreadsheets in the right circumstances) and manual records will no longer be appropriate. It is a new portal.
So if you currently use a software programme to transmit directly to HMRC, the portal details kept within your software will need to be changed at the right time, and you will need to check your software is up to date to enable such new digital transmission.
When do you need to start?
This depends upon your VAT quarters. If your quarter ends on 31st March 2019 then the digital records system will start from 1st April 2019. If your VAT quarter ends on 30th April 2019 the digital records system will start from 1st May 2019. And finally if your VAT quarter ends on 31st May 2019 the digital records system will start from 1st June 2019.
So the first full VAT returns falling under this new system and new HMRC portal will be quarters ending 30th June 2019 (due to be submitted by 7th August 2019). For anyone filing monthly VAT Returns then April 2019 will be the first month (due for submission by 7th June 2019).
What if your business is VAT registered with sales below £85,000 which then rise above £85,000?
Businesses with Sales for VAT purposes below £85,000 are not subject to the MTD for VAT submissions and records rules at present. However, as we understand the position, you will need to monitor your year to date sales for the past 12 months at the end of each and every month (just the same as you would need to if you were not VAT registered – to ascertain whether or not you needed to register).
Once you note that you have exceeded the £85,000 limit you must then file future VAT Returns and keep records in accordance with the digital format. There are likely to be penalties if you do not file appropriately.
What are digital records?
Digital records refers to the way the monetary values for sales and purchases etc are recorded. It is not about the physical sales invoices and purchase invoices. Manual records will not be allowed.
So digital records means software on your computer desktops/servers or cloud based software which will include Sage Line50, Sage Accounting (or Sageone), Quickbooks or Quickbooks on line, Xero, Freeagent, KashFlow etc etc. All of these software providers are working with HMRC to have in place an approved API to enable submission directly from within the software.
Under current rules Excel spreadsheets are also acceptable so long as the data is transferred through a suitable API and submitted by that extra piece of software. For those businesses that use spreadsheets or have bespoke software that is capable of exporting files in a CSV format, we now have suitable HMRC approved API software whereby we simply transfer your Excel or other data via a CSV import and then submit on your behalf to the new HMRC portal.
Do I need to keep records of invoices etc in digital format?
The simple answer is no. You do not need to scan your physical sales and purchase invoices etc, nor upload them to your cloud software (if you are using such software) if you do not wish to. Of course you may find this helpful to do so but it is not compulsory. Remember that any records scanned (with originals destroyed) must be backed up securely so that details can be retrieved in the event of HMRC enquiries, and kept for 6 years.
What do I need to do to check my records comply with the new regulations?
Over the coming months you should check that you are compliant or become compliant. This will include asking your software provider to confirm their software is MTD for VAT ready and approved, identifying whether you need to upgrade your existing versions, or discussing your current format and recommending the way forward. Everyone has different needs. We will be helping all of our clients with this exercise.
What if I am using cloud software?
We understand that all software providers are working with HMRC to ensure they will be compliant for submissions starting from April 2019. Many are already compliant. It is however worth checking with them. Any updates they make to their software should automatically be available to all users without the need to download anything.
What if I use Sage 50 desktop software?
We have been informed by Sage that their latest version 25 (which has just been released in the middle of October 2018) is MTD for VAT ready. Anyone not on that version (whether they are using Sage 50, Sage Instant or Sage Essentials etc) will need to upgrade to that version and pay a monthly subscription for the ongoing software. Sage tell us that they will be contacting all of their customers shortly. They will offer the software at RRP.
However if you are clients of Fuller Spurling, as we are Sage partners, if you obtain the software through us on a monthly subscription we can get 50% discounts of their RRP rates. So make sure you talk to us!
What if I am using bespoke software?
Some businesses are still using old software created by all sorts of providers that has never been upgraded. This could present a problem in the long term for MTD for VAT. For clients of Fuller Spurling, there is a workaround solution at the moment whereby, if your data can be exported to a CSV file, we can upload this into our IRIS bridging software (which has a specific API) which means we can then submit the details to HMRC on your behalf.
There may be other possibilities for you with other providers creating Excel API‘s in due course. Clearly you will need to look at your options for both the short term and the long term.