VAT registered businesses, not already making tax digital compliant, need to prepare for changes next year

There is currently a requirement for VAT registered businesses with a taxable turnover above the VAT registration threshold to keep records digitally and to file their VAT returns directly from their digital systems. This system is referred to as Making Tax Digital for VAT or MTD.

The digital system can be a software programme on a computer or an app on a tablet or smartphone. Whichever system is used it must record certain information, such as the date supplies were made and their value for income and the date of supply and value of purchases made plus the amount of VAT to be reclaimed. Generally this means recording each sales and expense invoice.

There are specific rules for certain types of businesses including retailers or businesses using margin, Flat Rate and other schemes. MTD does not remove the requirement to keep and preserve particular records (including those required by margin or retail schemes or for Partially Exempt businesses) but it does specify which records must be kept digitally.

If records are kept on a variety of software the transfer of data between them has to be made using a digital link and not manually.

At present HMRC only receives the values for the nine boxes of a VAT return, not the detail of how these have been calculated. Businesses required to use MTD have to submit these figures to HMRC directly from their software and not enter them manually into the HMRC system.

In short MTD means businesses have to keep their VAT records and submit their VAT returns electronically.

From April 2022 MTD for VAT is being extended to all VAT registered businesses. The change will apply from the first VAT return period beginning on 1 April 2022 or later.

HMRC may grant exemption if they are satisfied MTD is not practical, the examples they give are due to age, disability or location, if a business is subject to an insolvency procedure or it is run entirely by practising members of a religious society (or order) whose beliefs are incompatible with using electronic communications or keeping electronic records.

VAT registered businesses that are not yet fully MTD compliant need to consider how to prepare for MTD sooner rather than later. Businesses that are registered for VAT on a voluntary basis could deregister although this may not be without a cost. In some circumstances deregistering will trigger a VAT liability on stocks and assets that are on hand when the business leaves the VAT system. This may include high value assets such as property on which an Option to Tax has been exercised or which has recently been purchased plus VAT where the cost may be considerable. The implications of deregistering do need to be carefully considered.

HMRC also plan to introduce MTD for Income Tax Self Assessment in stages, starting in April 2024. So, deregistering for VAT may simply delay the inevitable.

For businesses that wish to, or have to, remain VAT registered and who are not eligible for exemption there are a number of options. Most off the shelf accounting packages are MTD compliant or for businesses using spreadsheets bridging software can be used to link the spreadsheet to the HMRC systems.