Making Tax Digital (MTD) for VAT rules is now effective for all businesses who must ensure ALL quarterly VAT returns are submitted via compatible software from 1st April 2022, even if the turnover is less than £85k.
New guidance on penalties for non-compliance
New guidance issued by HMRC on the penalties for non- compliance with MTD has highlighted in particular a penalty of up to £400 for every VAT return a business files without using ‘functional compatible software’.
Functional compatible software means a software program, or set of software programs, products or applications that can:
- record and store digital records
- provide HMRC with information and VAT returns from the data held in those digital records
- receive information from HMRC
There are additional penalties if the business does not keep their records digitally.
HMRC may charge the business a penalty of between £5 to £15 for every day on which the digital record keeping requirement is not met.
Digital record keeping requirements
To meet the digital record keeping requirement, the business’s functional compatible software must contain:
- the business name, address and VAT registration number
- any adjustments from calculations made outside the functional compatible software for any VAT accounting schemes used
- the VAT on goods and services supplied, meaning everything the business sold, leased, rented or hired (supplies made)
- the VAT on goods and services received, meaning everything the business bought, leased, rented or hired (supplies received)
- any adjustments made to a return
- the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything bought and sold
- the rate of VAT charged on goods and services
- details of any ‘reverse charge transactions’, where the business needs to record the VAT on the sale price and the purchase price of the goods and services bought
- copies of documents that cover multiple transactions made on behalf of the business like those made by volunteers for charity fundraising, a third-party business or employees for expenses in petty cash.
All transactions must be contained in the functional compatible software - there is not a requirement to scan or upload supporting documents like invoices and receipts.
MTD consultation for retailers
HMRC has now published draft notices of the detailed provisions for consultation. The consultation invites views on these which provide additional information on the key requirements of MTD as they relate to:
- The use of functional compatible software.
- The information required when submitting quarterly updates and end-of-period statements.
- Retail sales election.
The draft notices specify the proposed dataset requirement. Later in the year, HMRC will publish guidance to explain how customers can reflect any accounting and tax adjustments that may be required to reconcile the quarterly submissions to the final taxable profits for the year (The End of Period Statement). The consultation sets out the adjustments that are likely to be required, such as accruals, prepayments, private use adjustments, stock and capital allowances.
As expected, the breakdown of income and expenses broadly follows the headings on the self-employment and property income pages on the Self-Assessment Tax Return.
The consultation document states that where the annual turnover is below the VAT registration threshold, the individual may choose to provide the total of all income and the total of all expenses, instead of a detailed breakdown of expenses. This is also consistent with the self-employment pages in the Self-Assessment Tax Return.
Retail sales businesses may enter a single digital record of the daily gross takings for any retail sales made.
Other sectors required to comply with MTD
We now know that from April 2024, MTD for Income Tax will apply to sole traders, property landlords and certain other businesses with gross turnover and/or property income over £10,000 a year. The system will then be extended to partners from April 2025 and LLPs and partnerships with corporate members from April 2026.
Further information
Please contact a member of the LWA Tax Team if you need advice about making sure your business complies with MTD. We’re here to help! In the meantime, for further information on the changes outlined above, please see: Tertiary legislation for Making Tax Digital for Income Tax - www.gov.uk.