The new VAT requirements for businesses under the Government’s Making Tax Digital (MTD) initiative come into force from 1 April 2019 (or 1 October 2019 depending on your business – see Making Tax Digital for VAT – do you know your start date?). As your business takes steps to comply, you need to make sure you don’t fall foul of existing record-keeping requirements.
Starting with the basics
MTD specifies certain records relating to VAT transactions that your business must keep digitally. These can be divided into three categories:
- Designatory data.
- Supplies made.
- Supplies received.
1. Designatory data
In terms of designatory data, you’ll need to have a digital record of your business name, the address of your principal place of business, your VAT registration number and any VAT accounting schemes you use.
2. Supplies made
HMRC has also specified digital record requirements for every supply that your business makes. These include a digital record of the time of supply, its net value (excluding VAT) and the rate of VAT charged. Fortunately, where an invoice contains multiple supplies that are within the same VAT period and charged at the same rate of VAT, these can be recorded as a single entry in your accounting system. On the other hand, if different VAT rates apply, you’ll need to record these separately.
HMRC has also clarified its requirements relating to supplies made by third party agents (such as property management agents). There had been some concern that HMRC might require businesses to establish a digital link to their agents’ systems or provide details on a transaction-by-transaction basis in some format. The good news is that HMRC has taken a more pragmatic approach. Where a third party agent makes supplies on your behalf, those supplies will not fall within the digital record-keeping requirements until you receive the information from the agent. Where that information is received as a summary document, you can treat this document as one invoice issued by you for the purpose of creating your digital record. This is a welcome outcome!
3. Supplies received
For each supply your business receives, you’ll have to record the time of supply, its value and the amount of input VAT to be claimed back.
There are specific rules governing the treatment of more complex transactions which may happen outside of the accounting system, such as error adjustments, partial exemption calculations, capital goods scheme adjustments and reverse charges.
Businesses will still need to abide by all other existing VAT rules – and these require business records, invoices and information about VAT accounts to be kept for a period of six years. Furthermore, if you import goods and suffer import VAT, you’ll still need to retain the original C79 certificates issued by HMRC as evidence to support VAT recovery.
This is important, particularly as many businesses in the run-up to MTD are moving to cloud-based accounting services or implementing new accounting software. Most cloud-based software service providers will migrate two years’ worth of data for free, but then charge for any additional years. Businesses need to make sure that they do transfer data covering a full six years, or that any records within that window that aren’t transferred are still readily accessible. If HMRC requires information from past years, you need to be able to provide it quickly and easily.
Penalties for non-compliance
HMRC can impose penalties on businesses that fail to maintain the right digital records required by MTD regulations. It is our understanding that the existing penalties for failure to keep VAT-related records for the prescribed six year period, as well as in the appropriate format, would apply for breaches in maintaining digital records when the new MTD rules come into force.
At this stage, it’s not clear whether HMRC will take a lenient approach during the ‘soft landing’ period with respect to breaches of the digital record-keeping requirements. The soft landing period is designed to allow for teething problems faced by businesses in creating the appropriate digital links required between their functional compatible software, but failure to comply with the other aspects of the MTD regulations (such as record-keeping) is unlikely to be tolerated.
Start preparing now
Businesses preparing for MTD are advised to undertake an assessment of their accounting system(s), current VAT processes and reports, as well as how financial records are held at present. Ask yourself the following:
- Are records held digitally in the business?
- How many financial systems are operated?
- What reports are used to compile the VAT return? Are these digitally linked between source system(s) and the VAT return workings?
- Is your accounting system ready to transmit VAT returns digitally to HMRC?
- Even if your current accounting systems are compliant, MTD may provide the ideal opportunity to drive process efficiencies and improve data and records management to achieve an overall benefit. A move to the cloud could be the answer.
If you have any questions relating to the issues discussed here, please get in touch.