MTD myths busted
Making Tax Digital for VAT came into effect this year. For most businesses this means that VAT returns for periods starting on or after 1 April 2019 must be submitted via MTD-compliant software. However, with so much information available about Making Tax Digital, many businesses and their accountants are still unclear on what is MTD fact, and what is MTD myth.
This myth-busting article looks at common questions and queries around MTD for VAT. From the soft-landing period, through to fines and compliance with digital record keeping rules, read on to understand Making Tax Digital for VAT.
BTCSoftware has put together 15 myths that will help to clear the way.
- “All businesses are required to sign up to MTD for VAT”
Not all businesses will have to sign up to MTD for VAT in 2019 when the scheme goes live. The government has slowed the pace of mandation of MTD for VAT in response to concerns about the speed of change, especially for small businesses. This means that businesses with taxable turnover under the £85,000 VAT threshold are not required to sign up to MTD for VAT at this point. There are also a minority of VAT registered businesses with more complex VAT requirements that have been allowed a deferral of mandation to 1 October 2019.
- “Bridging software is only compliant during the soft-landing period”
Bridging software works by creating a digital link between your bookkeeping software or spreadsheet records and HMRC. This enables your VAT return data to be transmitted to HMRC digitally, and therefore this is MTD for VAT compliant through the soft-landing period and beyond.
- “Spreadsheets are not a valid form of digital record keeping”
Early in the implementation of MTD, HMRC was planning to prevent the use of spreadsheets for digital record keeping. However, HMRC now recognises spreadsheets as a commonly used and acceptable form of digital records and allows VAT returns from data held in spreadsheet format. Spreadsheets will continue to be permitted beyond the soft-landing period.
- “Data cannot be changed on the digital record once exported from the bookkeeping software”
HMRC allows for changes to your records once exported to a spreadsheet, as long as any adjustments are documented in the spreadsheet to preserve the digital trail. This means that more complex VAT calculations and adjustments can be performed on the data before it is transmitted digitally to HMRC. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links.
- “HMRC needs to see all of the transactions that make up the VAT return”
Originally, at the start of MTD, HMRC was planning to collect each individual account posting made by every business in real-time. As the MTD implementation has progressed, this is no longer the case. For MTD for VAT, HMRC requires only the nine VAT total boxes that make up the return.
- “Older bookkeeping packages must be upgraded to use MTD compliant cloud accounting software”
Businesses may continue to record their transactions in their preferred digital format, which could be a bookkeeping package, or a spreadsheet. The important step is that the software can transfer the VAT return data to HMRC digitally. If your older software is not MTD compliant, you do not have to upgrade it as bridging tools are available to extract data from your digital records and provide this to HMRC in a compliant form.
- “It’s still OK to type the nine boxes of data on a spreadsheet to submit to HMRC”
You will need to be able to prove your digital record keeping and digital link between your bookkeeping spreadsheet and HMRC if required. Using a bookkeeping package or a spreadsheet and a bridging tool will allow full compliance with MTD for VAT without the need to manually type in your data. Making Tax Digital is designed to eliminate manual errors in VAT returns and so all data should be digitally linked.
- “The only digital data to be sent to HMRC is the nine boxes on the VAT return”
The only data to be transmitted to HMRC are the totals, plus your business information. However, digital record keeping means that income and expenditure records are kept digitally, and also that you include digital records for the business name, address, VAT registration number, and VAT schemes. You also need to be able to provide a digital link between your invoices and VAT return if requested, and so should record the tax point date, net value, and VAT rate for each supply made. For supplies received, you should record digitally the tax point, value of the supply, and the amount of input tax to be claimed.
- “Supplier statements cannot be recorded as a single invoice and therefore each supply on the statement must be recorded individually”
HMRC accepts that recording the individual supplies from a suppliers’ statement may create additional work for a business. As such, you are able to record the statement totals as long as all the supplies on the statement relate to the same VAT period and the total VAT charged at each rate is shown. Bear in mind that in HMRC’s view, it is best practice to record digitally the individual supplies as this means less risk of invoices either being missed completely or being entered twice - once as an invoice, and once as part of the statement. There is also less risk of the wrong rate of VAT being applied.
- “A CSV data file transfer is not a digital link”
Use of a CSV file is recognised by HMRC as an acceptable form of digital link. This means that you can export your data in CSV format from your digital record keeping software and submit it to HMRC as an MTD compliant VAT return.
- “Using copy and paste is a valid digital link between my record keeping software and HMRC”
Moving information from your bookkeeping or record keeping software using copy and paste to transmit data either to HMRC or between software (i.e. between your bookkeeping software and Excel) is not permitted by MTD rules as this is not considered a digital link.
- “It’s possible to go back to using the VAT 100 submissions after signing up for MTD for VAT”
Once you have signed up to MTD for VAT, you are unable to return to using the old VAT 100 submission option. The only way to revert is to deregister for VAT.
- “Signing up to MTD for VAT can be completed just before the first MTD compliant VAT return is due”
There are certain time frames issued by HMRC to allow businesses to sign up to MTD for VAT successfully. For a business to pay their VAT return by Direct Debit, they must sign up no later than seven days before their first MTD for VAT return is due. It is also important to allow 72 hours between sign up and the first return. You should also allow 24 hours between the final ‘old’ VAT return and the submission of the first MTD compliant VAT return.
- “HMRC are not issuing fines and penalties during the soft-landing period”
HMRC have advised that they are taking a soft approach to penalties and surcharges whilst MTD for VAT is rolled out, however this doesn’t mean that no penalties will be issued for late submission. The key phrase is that HMRC are not issuing penalties to businesses that are “doing their best to comply” (Theresa Middleton, HMRC MTD director).
- “MTD for VAT registration is automatic”
You need to register the business for MTD for VAT yourself as this isn’t an automatic process. As an agent, you can create an Agent Services Account and link your HMRC Online Services Government Gateway ID to bring your clients on-board. The business registering will also need to sign up to MTD for VAT, and then authorise you as their agent.