Making Tax Digital for VAT (“MTD”) has now been in operation since 1st April 2019 and affects all business who have taxable turnover above £85,000 per annum, with a few exceptions, and those businesses who have chosen to voluntarily apply MTD. As well as keeping digital records, all business falling under the MTD rules are required to have digital links between all parts of their functional compatible software.
HMRC allowed a ‘soft landing period’ for this to be achieved. This meant that businesses have until their first VAT return period, starting on or after 1 April 2020, to put digital links in place. With 1 April 2020 fast approaching, business registered for MTD need to consider whether any process changes are required to ensure MTD compliance.
HMRC granted a six month extension to some VAT registered businesses and notified them in writing. If you received a letter from HMRC telling you that you could defer compliance with MTD until VAT periods starting on or after 1 October 2019 then you also have a six month extension to the need to comply with maintaining digital links.
HMRC define digital links as a digital link is an electronic or digital transfer, or exchange of data, between software programs, products or applications and maintaining these within your VAT return preparation process has the force of law.
What does this mean in practice?
In practice this should not be a complete change in how you do things as, in addition to the obvious things such as the direct transfer of data between software programmes via automated transfer or an API interface, HMRC also accept importing, exporting, uploading and downloading data via excel, csv and other appropriate file formats as digital links. They also accept transferring data by email files or sending them on a USB drive. So this will cover a lot of the ways data is transferred from one place to another.
If you are maintaining your records exclusively within functional compatible software such as Xero, QuickBooks, Sage or any of the other off the shelf packages which are MTD compatible, even if they are integrated with another piece of software such as a sales management tool or EPOS system, it is likely that no further action is necessary.
The main approaches that are not acceptable are cutting and pasting data from one place to another or analysing information in one place and then manually entering the totals in another.
However, if you are using either of these methods, there will be some simple changes you can implement in your VAT return preparation process, such as linking cells in workbooks, which will mean that you are compliant with the requirements. This can also be applied to the preparation of group VAT returns.
What about complex VAT returns?
HMRC accept that for VAT returns that require calculations to be made (such as businesses which are partially exempt, use the margin scheme or that have made purchases which fall under the capital goods scheme) you can prepare the calculations in a separate spreadsheet or equivalent and then the final outcome of the can be entered into the software being used. Please note that these records must be kept digitally in order to comply with other aspects of the legislation.
These element of the MTD rules becoming enforceable need not be a source of significant concern. Even if you are not currently compliant, it is likely that with only a few changes to how you prepare your VAT return you will become compliant with the legislation.
There are rumours circulating that this change means that those who prepare their returns in Excel or non-compliant software and then submit using bridging software will have to move onto compatible software in order to be compliant. This is not the case and there is nothing in the current legislation requiring this as long as you maintain the digital links which can usually be achieved by exporting the data from your bookkeeping software rather than viewing the numbers on screen and typing them into a spreadsheet.
If you would like to discuss any concerns you may have surround this or would like us to review your procedures for preparing your VAT returns please get in touch.