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HMRC publishes further guidance on the digital record keeping and return requirements for Making Tax Digital (MTD) for VAT

Elizabeth Wilson 17 July 2018 No comments

HMRC has published VAT Notice 700/22 providing further guidance on the digital record keeping and return requirements for Making Tax Digital (MTD) for VAT.

This follows a consultation on the proposed rules for VAT reporting under Making Tax Digital (MTD), as reported in our earlier blog article.

The new regulations are due to take effect from 1 April 2019 for most VAT registered businesses.

What are the MTD for VAT requirements?

Businesses impacted by the regulations will be required to:

  • store VAT records digitally,
  • submit VAT returns from those digital records by using the application programming interface (API) platform, and
  • maintain a clear audit trail of digital links from source data to the filed VAT return.

Who is impacted by the Notice?

All VAT registered businesses (including those overseas) with a UK taxable turnover above the £85,000 VAT registration threshold will be required to keep specific digital records and submit VAT returns using “functional compatible software”, under the rules set out in the Notice.

Businesses exempt from MTD for VAT, e.g. where their taxable turnover is below £85,000, may voluntarily opt in. This can be done by contacting HMRC in writing before the start of the first VAT period from which a business wants to report under the new rules using the MTD service.

Businesses that are subject to the new regulations may, under limited circumstances, be granted an exemption by contacting the VAT Helpline i.e. a business will not have to follow the MTD rules if HMRC are satisfied that any of the following apply:

  • the business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (e.g. those religious beliefs prevent them from using computers), or
  • it is not reasonably practicable to use digital tools to keep the business records or submit returns, for reasons of age, disability, remoteness of location or for any other reason, or
  • the business is subject to an insolvency procedure.

What is functional compatible software?

Records must be digitally recorded and VAT returns electronically submitted using ‘functional compatible software’.

This is a software program, or set of software programs, products or applications, that must be able to:

  • record and preserve digital records,
  • provide to HMRC information and returns from data held in those digital records by using the application programming interface (API) platform, and
  • receive information from HMRC via the API platform.

HMRC is expecting individual software products to be made available that will perform all three of the required functions above, however a combination of functional compatible software products (including spreadsheets to record and preserve digital records) can also be adopted.

If a set of software programs, products or applications are used as functional compatible software there must be a ‘digital link’ between these pieces of software.

Who will supply the software?

HMRC will not be providing businesses with any software, but has been working with a number of software suppliers to develop compliant functional compatible software.

Alongside the VAT Notice, HMRC has published a list of those suppliers who have both:

  • tested their products in HMRC’s test environment, and
  • demonstrated a prototype of their software to HMRC.

The list of suppliers will be updated as testing progresses.

Additional guidance

Further information is provided in the Notice on:

  • the specific records that must be kept digitally,
  • examples of where a digital link is required and acceptable digital links,
  • correcting errors,
  • VAT calculations outside of software,
  • how to record adjustments and reverse charge transactions,
  • application of special VAT accounting schemes, and
  • the use of agents.

In order to support stakeholders’ communications on the new Making Tax Digital regulations to clients, customers or members, HMRC has also released a useful Making Tax Digital for Business “Stakeholder Communications Pack”.

We will shortly be publishing a detailed white paper on Making Tax Digital for VAT and what businesses can do now to prepare for the new regulations.