Since April 2022, all VAT-registered businesses have been required to comply with the ‘MTD for VAT’ regulation and submit their VAT returns via MTD-compatible software. This also includes VAT-registered businesses on a voluntary basis, with an annual turnover of less than £85,000.
How will this affect your next VAT return?
Whether your next VAT return is due on the 7th July or 7th August, it will be required to be submitted via an MTD-compatible software or a ‘Bridging Software’. The process of manually typing VAT records into your HMRC tax account is being phased out.
Yes, it does sound a bit technical, but in reality, the process of digitally reporting to HMRC is quite straightforward.
In this guide, we’ll explain the requirements of how to become MTD compliant and how to register for the scheme.
MTD for VAT opt-in guidelines
Starting from 1st April 2022, all VAT-registered businesses are required to follow the MTD for VAT regulation.
This also includes all voluntarily vat registered limited companies, landlords, sole traders, partnerships and charities regardless of the level of turnover.
How does Making Tax Digital work?
The primary concept of Making Tax Digital relays on electronically exchanging information between two or more software applications.
It means that your invoices and VAT-related transactions will be transmitted digitally from the MTD accounting software onto HMRC’s online reporting systems, rather than being submitted manually.
The actual exchange of information is done via what HMRC refers to as ‘Digital Links’, which replace the current process of login into your tax account and manually typing in VAT records. Instead, your accounting software will communicate with HMRC’s systems and transmits the relevant VAT data for you.
Digital record keeping
VAT-registered businesses are required to store each invoiced transaction digitally. This could be done by scanning your invoice details or entering transaction records, into your MTD-compatible software.
In addition, you may need to keep specific VAT-related records digitally. However, not all of your accounts records will be required.
Please note that by law, you still have to keep some invoices in their original, physical form.
Which VAT records do you need to keep?
- Business name or organisation.
- The address of the principal place of business.
- VAT registration number (VRN).
- Details of any VAT accounting scheme used.
These records cover the supply you have made and should only include supply records you will submit on the VAT Return.
- Time of supply.
- The net value (excl. VAT) of the supply.
- The rate of VAT charged.
- Time of supply.
- The value of the supply received.
- The amount of input tax you will claim.
Using Excel Under MTD for VAT
Storing and calculating your records locally on software such as Microsoft Excel is still an option; however, you will need to install a ‘Bridging Software’ onto Excel or transmit your VAT records directly through HMRC’s application programming interface (API).
Implementing a ‘Bridging Software’ requires some advanced technical skills, so it may not be the most practical solution for most businesses.
What is a ‘Bridging software’?
A ‘Bridging’ tool is an API-based software that transmits your VAT-related data from a local software such as Excel to HMRC’s reporting system. To allow such communication to happen, the Bridging software should be installed onto Excel.
The main benefits of digitizing VAT
Real-Time financial status
Having up-to-date figures of how much tax you may owe, is one of the main benefits of tax digitisation. In simple terms, it means better cash flow management for your business.
Applying simple scheduled updates of transactions onto your MTD software should get you a real-time estimation of the amount of tax due, without having to wait for your year-end accounts to be completed.
This could be quite useful for calculating your expected dividends and take-home pay, at any given time.
Up-to-date tax figures will allow you to manage & pay your bill more frequently if it better suits your annual budget plan.
VAT Return Deadlines
There are no changes to VAT submission dates under Making Tax Digital. Hence, returns will need to be continued to be filed one month and 7 days after your VAT quarter end.
If your VAT return runs from April 1st to June 30th, you have until August 7th to file your VAT return.
Late Payments Penalties
HMRC’s Default Surcharge system for late VAT payments applies to all businesses who make recurring VAT payments through MTD.
Starting 1st January 2023, Default Surcharge penalties will change to a points-based penalty system for VAT return late submissions.
Taxpayers will no longer receive an automatic financial penalty if they fail to meet a submission obligation. Instead, they will incur a certain number of points for missed obligations before a financial penalty is levied. ~ Gov.UK
How does the Flat Rate VAT apply to MTD?
Filing VAT returns through MTD-compliant software also applies to businesses opted-in to the Flat Rate VAT scheme.
However, as the Flat Rate VAT scheme is based on a percentage of the turnover, digital records of supplies received will not be required, unless they relate to capital items that cost more than £2,000 including VAT).
There are a few other cases when you wouldn’t have to enrol for MTD.
- Inability to follow MTD guidelines, due to religious beliefs.
- Inability to use digital tools due to age, disability, remote location or other reasons.
- You are in the process of insolvency.
How to register for MTD for VAT?
If you haven’t registered for VAT yet, you would need to create a Government Gateway account first.
Click Here to create a Gateway account.
Once you have completed creating your new Gateway account, or if you already have an account, login here and provide the below VAT details:
- VAT number.
- VAT registration date.
- Principle or trading address of the business.
For your convenience, you could also follow the simple steps shown in the video below and complete your MTD registration.
Need Further Advice About Upcoming Digital Tax Changes?
Please don’t hesitate to get in touch. Our MTD specialists at Clever Accounts will be happy to assist.
Call, 0113 518 8800 or Request a call back.