Making Tax Digital for VAT: answering the key questions

Making Tax Digital for VAT (MTD for VAT) is now live. Firms with a taxable turnover above the VAT registration threshold (currently £85,000) must comply with the new rules. Below, we answer some of your key MTD for VAT questions.

Q: What information needs to be kept digitally?

A: Under MTD for VAT, firms must keep specific records digitally. Additionally, all future VAT returns must be filed directly from digital records via an Application Programming Interface (API).

Submission of the return can be from API-enabled spreadsheets, software or bridging software. Businesses using more than one software program are required to have 'digital links' in place between the products.

Q: Does HMRC provide MTD for VAT software?

A: HMRC does not provide firms with MTD for VAT software. It does, however, list recognised products on the gov.uk site. Businesses are encouraged to contact their software provider to ascertain whether MTD for VAT products are available.

Q: Am I required to sign up to MTD for VAT, or is my business enrolled automatically?

A: Businesses are required to sign up to the MTD for VAT initiative. Business owners will need their firm's Government Gateway user ID and password, alongside its VAT number, to sign up. Once the process has been completed, HMRC will confirm via email that your sign-up has been successful.

Q: Do all businesses have the same start date?

A: Each firm has its own date to start using the MTD for VAT system. Your start date is dependent on your VAT quarters. If your taxable turnover is above £85,000, the MTD for VAT rules are compulsory for your first VAT return period starting on or after 1 April 2019. Those businesses with turnover below the VAT registration threshold are not required to use MTD for VAT. However, they may wish to join the scheme voluntarily.

Some businesses are exempt from MTD for VAT. These include:

  • businesses run by practising members of a religious society or order with beliefs incompatible with MTD for VAT requirements
  • businesses subject to an insolvency procedure
  • those satisfying HMRC that, for reasons of age, disability, remoteness of location or for any other reason, it is not reasonably feasible for them to use digital tools to keep records and submit returns.

A significant deferral of MTD for VAT applies for a small group of taxpayers with 'more complex' requirements. These firms have been given an additional six months to prepare for the initiative.

For more information on which types of business are affected by the deferral, please see below. Firms subject to the deferral adopt MTD for VAT rules for their first VAT return period starting on or after 1 October 2019.

Q: Which firms are affected by the deferral?

A: The deferral applies to not-for-profit organisations not set up as a company; trusts; VAT divisions; VAT groups; local authorities; public corporations; and traders based overseas. Public sector entities required to provide additional information on their VAT return, those who must make payments on account, and annual accounting scheme users are also covered by the deferral.

Q: If my turnover falls, can my business leave MTD for VAT?

A: The MTD for VAT regulations specify that, once a business is in MTD for VAT because its taxable turnover exceeds the VAT registration threshold, it must remain in the scheme, even if turnover subsequently falls below the threshold.  

MTD for VAT rules only cease to apply if a business qualifies for exemption, or if it deregisters from VAT.

Q: Do penalties apply for incorrect filing under MTD for VAT?

A: For the first year, HMRC intends to take a more lenient approach to issuing MTD for VAT penalties. HMRC has termed this the 'soft-landing' period. For VAT return periods beginning between 1 April 2019 and 31 March 2020, penalties won't be charged if businesses don't have digital links between software programs in place. Cut-and-paste will continue to be an acceptable way to transfer data to HMRC. The soft-landing period has been adapted for those businesses affected by the deferral, permitting them 12 months to put digital links into place.

However, where information is transferred from the accounting records into a separate program for submission to HMRC via the API, transfer must be digital.

In addition, the VAT default surcharge regime will operate until 'at least' 2021. From this time, HMRC intends to implement a new penalty 'points' scheme for late submission of VAT returns and late VAT payments.

Ensuring you are compliant with the MTD for VAT rules is crucial. We are always on hand to answer any questions you may have - simply contact us for more information.

Southampton Office

12-14 Carlton Place
Southampton
Hampshire
SO15 2EA

Tel: 02380 234 222

Winchester Office

6 Charlecote Mews
Staple Gardens
Winchester
SO23 8SR

Tel: 01962 842000

Reading Office

3 Richfield Place
Richfield Avenue
Reading, Berkshire
RG1 8EQ

Tel: 0118 9511 115

London Office

90 Long Acre
Covent Garden
London
WC2E 9RZ

Tel: 0203 470 0777