From April the 1st 2021, UK VAT registered businesses began facing more obligations towards Making Tax Digital. These obligations were originally planned for implementation on April 1st 2020, however, due to the COVID-19 pandemic, were postponed. In addition, for the first time these obligations have been accompanied by penalties.
Who is Impacted by the update?
This change impacts VAT-registered businesses, individuals and charities who have a taxable turnover above the £85,000 VAT registration threshold. They are required to follow the Making Tax Digital (MTD) rules by keeping digital records and using software in order to submit their VAT returns.
Where taxable turnover is actually below the £85,000 threshold, a business, individual or charity can voluntarily join the MTD service for the time being. However, from April 2022 onwards, all VAT returns will require completing via submission utilising compatible MTD software. It is essential that the software chosen is fully compliant with the new rules.
What are the new rules?
Digital Records
Under the new MTD rules, UK VAT registered businesses who have a turnover above the £85,000 VAT registration threshold must keep and maintain VAT records digitally in a suitable and compatible software package which allows them to keep their digital records safe and submit VAT returns. Alternatively, they can use a “bridging software to connect non-compatible software (like spreadsheets) to HMRC systems”.
The new requirement in digital record keeping is compulsory for all VAT periods beginning April 1st 2021 for those who meet the above criteria.
The records which should be included under this new requirement include sales and purchase invoices with VAT. Any accounting records which are not related or specific to the VAT return requirements need not be included.
● A breakdown of the data which must be stored digitally is as follows:
● your business name, address and VAT registration number
● the VAT accounting schemes you use
● VAT on goods and services you supply (everything you sell, lease, transfer or hire out)
● VAT on goods and services you receive (everything you buy, lease, rent or hire)
● any adjustments you make on a VAT return
● the ‘time of supply’ and ‘value of supply’ for everything you buy and sell
● the rate of VAT charged on goods and services you supply
● reverse-charge transactions – where you record the VAT on both the sale price and the purchase price of goods and services you buy
● total daily gross takings if you use a retail scheme
● items you can recover VAT on if you use the Flat Rate Scheme
● total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme
Digital Links
When a business or individual is utilising more than one software package, these packages need to be digitally linked. These links can be summarised as follows:
● using formulas to link cells in spreadsheets
● emailing records
● putting records on a portable device to give to an agent
● importing and exporting XML and CSV files
● downloading and uploading files.
When linking these software packages, the following should NOT be included:
● ‘cut and paste’ manual adjustments to move data; and
● any manual adjustments and consolidations of group returns in spreadsheets.
How do the changes work in practice?
HMRC has put some clarity forward as they realise there will be some circumstances during the preparation of a VAT return where calculations will have to be made outside a software package, or there may be a need to enter data into a software package from other sources. HMRC therefore continues to allow usage of manual calculations for any special VAT schemes. This includes the partial exemption and capital goods scheme calculations.
It is required that the digital links between any software packages are in place before the business’ first full VAT period beyond April 1st 2021 – However, HMRC has also offered an extension to the deadline if there is no solution found to IT issues and the implementation of an uninterrupted operational implementation.
If an extension is required, an application must be made to HMRC as soon as possible, providing the following information:
● An IT map of the current accounting software showing where the digital journey fails, why it is “unachievable and not reasonable” at this time to export data via digital links.
● Reasons why the business is unable to meet the 1 April deadline.
● An action plan, with IT confirmation and timetable, to resolve the matter. This cannot take longer than the 1st of April 2022.
● Details of controls that ensure that any manual data transfer will be performed without errors.
It should be noted that HMRC will not accept ‘cost’ as a reason for extensions to be granted. In addition, for those who use a software platform which uses XML to file VAT returns with HMRC, they have now deactivated this method.
New Penalty System
As of the 1st of April 2021, HMRC has introduced a penalty system if there is failure to meet the new MTD obligations. These penalties will apply to the first completed VAT return on or after the 1st of April 2021 date.
The penalties can be broken down as follows:
● A default is recorded for a failure to observe the MTD rules or missing a filing. In this case a surcharge period lasting 12 months applies.
● If there is another failure a surcharge % applies to the VAT due on the latest return.
● If there are additional failures within 12 months a point system applies.
● The points result in % surcharges, starting at 2% and increasing to 15%, for each accumulated failure.
There are some additional fines and interest charges if errors are found within the VAT return. Fines can be 100% of the VAT due or over-claimed. If there are careless or deliberate inaccuracies within the return, there can also be 100% fines. If the taxpayer does not inform HMRC that their assessment is too low, then there is a 30% fine. Interest is also charged at a rate of 3% of the VAT
