Making Tax Digital for VAT: Are You Compliant?
Making Tax Digital for VAT (MTD for VAT) is now live. Businesses with a taxable turnover above the £85,000 VAT registration threshold come within the new rules and must comply with the initiative or face enforcement action. Here, we answer some of your key MTD for VAT questions.
Does my business have to do anything to get into MTD for VAT?
Yes. A business actually has to sign up to MTD for VAT. To do this, you need your Government Gateway user ID and password, and VAT registration number. HMRC should confirm, by email, that your sign-up has been successful. Alternatively, we can sign up for you.
Do all VAT-registered businesses start at once?
Each business has its own start date, dependent on its VAT quarters. If your taxable turnover is above £85,000, MTD for VAT rules are compulsory for your first VAT return period starting on or after 1 April 2019. If your turnover is below the VAT registration limit, you don’t have to enter MTD for VAT, and you can carry on filing as you do at present. But if you prefer, you can join MTD for VAT voluntarily.
The only exceptions are for businesses in the deferrals category (see below). These adopt MTD for VAT rules for their first VAT return period starting on or after 1 October 2019.
Which businesses are subject to the deferral?
These are businesses that are: part of a VAT group or VAT division; based overseas; trusts; not-for-profit organisations not set up as a company; local authorities; public corporations; those making payments on account; annual accounting scheme users; and those using the VAT GIANT service. These businesses should have received written notification of their deferral status from HMRC.
Can my business leave MTD for VAT if turnover falls?
Once a business is in MTD for VAT because turnover is over the taxable limit, it stays within MTD for VAT – even if turnover subsequently falls below the limit. The obligation to keep digital records and file VAT returns with MTD-compatible software continues. Only if the business qualifies for exemption or deregisters from VAT do the MTD for VAT rules cease to apply.
Are there penalties for getting MTD for VAT wrong?
MTD for VAT is backed up by a system of penalties. For the first year, however, HMRC intends to take a slightly more lenient approach on penalties for the issue of digital links between software products. Businesses are given until at least 31 March 2020 to have digital links in place between software products.
HMRC refers to this as a ‘soft landing’ penalty period. During this period, businesses will not be required to have digital links between programs, meaning ‘cut-and-paste’ will continue to be an acceptable way to transfer information as a digital link to HMRC. For businesses in the deferral group, the soft landing penalty timetable is adapted to give them 12 months to become fully compliant in putting digital links into place.
However, there is an important exception to this. Where VAT return information is transferred out of the accounting records into a separate program for submission to HMRC via the Application Programming Interface (API), the transfer must be digital. This would apply, for example, where figures for the VAT return are collated in a spreadsheet and then transferred into bridging software for final submission. The transfer from spreadsheet to bridging software must use a digital link. These penalties are specific to MTD and are in addition to HMRC’s other penalty powers.
The VAT default surcharge regime will continue to operate until at least April 2021 and is outside the scope of the ‘soft landing’ for MTD for VAT. It is anticipated that from April 2021, there will be a new scheme based on penalty ‘points’ for late VAT return submission and late VAT payment.
Please do not hesitate to contact us for further advice.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.