From 1st April 2021, over one million UK VAT registered businesses will face new Making Tax Digital obligations. These obligations were originally planned from 1st April 2020 but were delayed due to the COVID-19 pandemic. For the first time, these obligations will be backed by the threat of penalties. In this blog, we summarise which UK VAT registered businesses will face the new ‘making tax digital’ obligations, what these obligations are, how to request an extension, and what the penalties will be if the required businesses do not fulfill their obligations.
Which businesses are required to follow the new rules?
VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are now required to follow the Making Tax Digital rules by keeping digital records and using compatible ‘making tax digital’ software to submit their VAT returns. If a business is below the VAT threshold it can voluntarily join the Making Tax Digital service now.
What are the new ‘making tax digital’ rules?
1. Digital records
Under the Making Tax Digital (MTD) rules, UK VAT registered businesses above the VAT threshold must keep and maintain relevant VAT records digitally within “a compatible software package that allows you to keep digital records and submit VAT Returns” or “bridging software to connect non-compatible software (like spreadsheets) to HMRC systems”.
This digital record-keeping requirement is mandated on all VAT reporting periods beginning on or after the 1st of April 2021, following the ending of the two-year ‘soft-landing’ phase of MTD. The requirements apply to the first complete VAT return from or after this date.
Records included under this include sales and purchase invoices with VAT. Accounting records not specific to VAT return requirements are not included in this.
The data that must be stored in a making tax digital software is:
- your business name, address and VAT registration number
- any VAT accounting schemes you use
- the VAT on goods and services you supply, for example everything you sell, lease, transfer or hire out (supplies made)
- the VAT on goods and services you receive, for example everything you buy, lease, rent or hire (supplies received)
- any adjustments you make to a return
- the ‘time of supply’ and ‘value of supply’ (value excluding VAT) 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
- your total daily gross takings if you use a retail scheme
- items you can reclaim VAT on if you use the Flat Rate Scheme
- your total sales, and the VAT on those sales, if you trade in gold and use the Gold Accounting Scheme
2. Digital Links
If a business uses more than one software package to keep records and submit returns, these packages need to be linked digitally within their VAT software. Some of the ways that these can be linked include:
- using formulas to link cells in spreadsheets
- emailing records
- putting records on a portable device to give to your agent
- importing and exporting XML and CSV files
- downloading and uploading files.
Digital links do not include:
- ‘Cut and paste’ manual process to move data; and
- Any manual adjustments and consolidations of group returns in spreadsheets.
There are some exceptions in the uninterrupted digital journey. HMRC has granted an exemption on manual calculations on special VAT schemes including the capital goods scheme, flat rate, Daily Gross Takings or partial exemptions.
The digital links between the VAT software packages used need to be in place before the business’s first VAT period after the 1st of April 2021.
How can a business apply for a ‘making tax digital’ digital links extension?
HMRC has offered an option to apply for a further extension to the 1st of April 2021 deadline if a business can show that there is no reasonable fix to legacy IT issues and the operation of an uninterrupted ‘digital journey’. Businesses applying for the extension must include a comprehensive plan to resolve any break in the digital journey.
The process for applying for this extension is as follows:
- Apply to the HMRC as soon as possible.
- Supply the HMRC with the following information:
- An IT map of the business’s current VAT accounting software and clearly show where the digital journey fails and why it is “unachievable and not reasonable” at this time to export data via digital links.
- Reasons as to why the business is unable to meet the 1st of April deadline.
- An action plan, with IT confirmation and a timetable, to resolve the problem. The end date of the timetable cannot exceed a year after the 1st of April 2021.
- Details of the controls the business will put in place to ensure the manual data manipulation or transfer that is being used temporarily will be done without errors.
The HMRC have made it very clear that cost alone will not be accepted as the justification for the business not being able to complete the digital journey.
What are the penalties if a business does not fulfil its obligations?
As of the 1st of April 2021, the HMRC is introducing a penalty system for Making Tax Digital for VAT software. These penalties will apply to the first completed VAT return on or after this date.
Penalty details are as follows:
- A default is recorded if a business fails to observe the Making Tax Digital for VAT rules or misses a filing.
- The business then enters a surcharge period, lasting 12 months, if they fault again. Surcharges are % penalties of the VAT due on the latest return.
- If there are further faults within 12 months then an accumulated point system applies.
- The points translate into % surcharges, starting at 2% and scaling up to 15%, for each accumulated fault.
Additionally, there will be fines and interest charges. Fines may be 100% of the VAT due or over-claimed if the returns include careless or deliberate inaccuracies. There could also be a 30% fine if the business does not inform the HMRC that a raised assessment is too low. Interest on late-paid VAT is charged at 3% of the VAT due.
For more information
Click here for the Government’s Step by Step guide for Making Tax Digital for VAT.
The latest cumulative update for all supported NAV Versions (2015/2016/2017/2018) and Business Central includes Making Tax Digital functionality/extensions. If you haven’t had them applied yet, TVision is still able to apply the MTD functionality/extensions to supported versions. For non-supported versions (2013 R2 and previous), we have created a Making Tax Digital software add-on. For more information, contact TVision on 01483 751888 or click here.
This blog is accurate as of 7 January 2021.