As a business owner, you will have plenty of tax responsibilities – and one of those key responsibilities will be managing your company’s Value Added Tax (VAT) commitments. That’s why you need to be aware of major changes the UK Government will be making in April 2019 to the way in which your company keeps tax records, communicates with Her Majesty’s Revenue & Customs (HMRC) and prepares its VAT Returns.
First of all – what is VAT and should your company be paying it?
Simply put, VAT is a general consumption tax that is assessed on the value added to goods and services. It’s a government tax that applies to most goods and services that are bought and sold for use or consumption in the UK.
Your business is legally obligated to register for VAT with HMRC if its VAT taxable turnover is more than £85,000 in any 12-month period, or if you know it will exceed this threshold. It’s worth noting that if your taxable turnover is less than £85,000, you don’t need to register for VAT. That being said, there are several benefits your limited company can enjoy by voluntarily registering for VAT.
For more information on VAT, check out our blog VAT registration – the pros and cons.
Making Tax Digital for VAT
Making Tax Digital is a new UK Government service designed to streamline HMRC processes and make paying tax quicker, easier and more efficient for companies doing business in the UK.
The new initiative will apply to all VAT registered businesses whose taxable turnover is above the VAT registration threshold and features additional rules on the way in which those businesses will be expected to keep digital tax records and use certain software to file their VAT Returns. If the turnover of your business is below £85,000 then you are not required to follow the new rules though you can opt to comply with the Making Tax Digital rules voluntarily.
Currently, it’s common for limited companies and sole traders to keep digital business records and accounts using a piece of software on a computer, tablet or smartphone. They’re often stored on a hard drive or via a cloud-based service, which is a safe way to ensure your company records are all backed up and secure.
But under Making Tax Digital, the government will now demand the software or services businesses are using to record and store tax records, and then submit to HMRC, can communicate with HMRC’s Application Programming Interface (API) platform, whilst upholding new security standards.
These standards will come into force for VAT Return periods beginning on 1 April 2019 – and so if your business is liable to pay VAT, you need to make sure your company software or web-based services comply with the new rules as soon as possible. If your VAT quarter runs from February – April then your first VAT quarter under the new rules will be the quarter from May to July.
It is worth mentioning that HMRC will allow for several exemptions where compliance with the new Making Tax Digital initiative is concerned. Your business will not need to comply with the government’s new VAT rules if HMRC is satisfied that:
- Your business is run entirely by practicing members of a religious society whose beliefs aren’t compatible with the regulations. An example of those beliefs could be if your religion prevents you from using a computer
- It is unreasonable or impractical for you to be expected to use digital record keeping tools based on your age, a disability or the remoteness of your location
- Your business is subject to an insolvency procedure
Apart from those exemptions, if your business is ordinarily liable for VAT, you should plan to comply with the Making Tax Digital rules. To help you and your business prepare for April 2019, we’ve sifted through the regulations to give you a comprehensive guide to the new rules and what your company must do to meet your legal obligations.
Your new digital record-keeping requirements
As a VAT registered business, you’re already obligated to keep certain records and accounts. Under Making Tax Digital, many of those records and accounts will now need to be digital, and you must use functional compatible software.
Functional compatible software is a system, software product or application that can record and preserve digital records, provide HMRC with information and returns from the data held in those records using HMRC’s API and receive information from HMRC using that same API platform.
It’s important to note that your business will not be expected to carry out all these functions using the same piece of software. For example, you might keep records using Microsoft Excel, but save those records on an encrypted cloud service and submit them to HMRC using a secure client portal or professional accounting software. All that matters, is you are able to comply with each aspect of the functional compatible software requirement.
Another crucial point – you do not need to store all your digital records in one place or on just one programme. Digital tax records can be kept using a range of compatible digital formats, as long as they are all accessible and meet HMRC requirements.
The new requirement for Digital Links
Under Making Tax Digital, data transfers or exchanges of information between software programmes, apps or services, must be digital if the information being transferred forms a part of your company’s digital records. After data has been entered into software as part of your records, any new transfer or modification of data needs to be done digitally, and those changes must be linked to demonstrate that information’s digital journey.
Transferring data manually within or between different parts of a set of software programs or apps is not acceptable. An example of a violation of the new rules would be if you were to write down details from an invoice in one online ledger, and then use the same handwritten notes to manually update another piece of software that forms part of your company’s functional compatible software system.
Once information has been made digital, it needs to stay digital.
That’s why ‘digital links’ are going to be such an important record-keeping tool for your business under the new rules. HMRC defines a digital link as being the transfer or exchange of data electronically between programmes without the need for manual intervention.
Examples of digital links include:
- Emailing a spreadsheet with digital records to a tax agent so they can import the data into their own software
- Transferring a data set onto a portable device and physically giving that device to a tax agent
- An XML or CSV import
- An automated data transfer
- An API transfer
Simply cutting and pasting data does not count as a digital link.
If the idea of implementing a whole range of new digital solutions and adopting a new set of digital link processes sounds a little daunting, don’t panic. HMRC has said it will allow for a ‘soft landing period’ that essentially acts as a grace period in which your business will be forgiven for not having fully implemented the changes.
The first year of implementation for the Making Tax Digital initiative for VAT periods starting between 1 April 2019 and 31 March 2020 won’t be required to have digital links. During that same period, HMRC will accept the use of ‘cut and paste’ as a digital link.
Rules on submitting VAT information to HMRC
As previously mentioned, under Making Tax Digital, your company must always and only submit information to HMRC via an API. Don’t worry, because chances are your commercial accounting or record-keeping software already comes VAT-enabled – but if not, HMRC has said it is willing to accept a couple of alternatives when accepting submissions.
The first alternative is bridging software, which is a digital tool that can be used to connect accounting software to HMRC systems. It allows the necessary VAT information to be sent to HMRC digitally.
The second acceptable alternative to API-enabled software is to use API-enabled spreadsheets – which can either combine with accounting software to submit the necessary VAT information digitally to HMRC or can be used to keep digital records and then be submitted directly to HMRC.
What VAT records do you need to keep digitally?
There are several kinds of records and different data types that you will be expected to keep digitally under Making Tax Digital. The first type of information you must keep digitally is called designatory data, which includes:
- Your business name
- Your business address
- Your VAT registration number
- Any VAT accounting schemes your business uses
In addition to designatory data, you will be expected to digitally record the following information for every single supply you make:
- The time of supply
- The value of supply (which is the net value, not including VAT)
- The rate of VAT you charge
These record-keeping requirements only apply to the goods or services you supply that are VAT-liable. If you carry out a supply that is exempt from VAT, you don’t need to record the above information digitally.
The same reporting requirements apply to supplies received, although instead of recording the rate of VAT you charged as part of a supply, you are obliged to record the amount of input tax you are planning to claim.
In cases where more than one supply is included in an invoice, under the new rules you’ll be allowed to record the totals from the invoice. Likewise, if you don’t know the actual amount of input tax that you’re going to claim, you should just record the total amount of VAT adjusted for any irrecoverable VAT.
You’ve also got to record certain data about any third-party agent that arranges to supply goods to or on behalf of your company. HMRC does include a caveat in the regulations, pointing out that in some cases this may not be possible or practical to record digitally on a daily basis – and so it’s okay to record third-party information as a single digital invoice.
Other changes which may affect your business
April’s regulatory changes could also impact the way your company records reverse charge transactions. If your business software records reverse charge transactions, you won’t need separate entries for the self supply and the purchase.
If your business software does not currently record reverse charge transactions, you’ll now need to record them two times: the first as a supply made, and the second entry as supplies received.
You must also digitally record summary data as part of each VAT Return you submit to HMRC. That means your functional compatible software will need to contain digital records of the total tax your company:
- Owes on sales
- Owes on acquisitions from other EU countries
- Needs to pay on behalf of your suppliers under a reverse charge procedure
- Is entitled to claim on business purchases
- Needs to pay or can reclaim following a correction or error adjustment
You’ll also be expected to record any other adjustment allowed or required by VAT rules, and it is important to note that a total of each adjustment must be recorded as a separate line in your software system.
How will Making Tax digital affect accounting schemes?
Because of the new digital record-keeping and reporting requirements Making Tax Digital will impose upon VAT liable companies, several common accounting schemes will also be affected by the new regulations.
First and foremost, if your business accounts for VAT using a retail scheme, you will now need to keep a digital record of your Daily Gross Takings (DGT). You’re not required to keep a separate record of the supplies that make up your DGT in your functional compatible software.
If you use the Flat Rate Scheme to account for VAT, the following rules will apply from 1 April 2019:
- You will not need to keep a digital record of your business purchases unless those purchases count as capital expenditure goods on which input tax can be claimed
- You don’t need to keep a digital record of the relevant goods used to determine whether your business must apply the limited cost business rate
If your business uses software that doesn’t have a Flat Rate Scheme setting or doesn’t enable you to include any rate of VAT other than the standard rate, reduced rate of exemption rate, you’ll then need to record each supply as either one standard rated supply or one zero rated supply.
The Gold Special Accounting Scheme
Does your company account for VAT using the Gold Special Accounting Scheme? If it does, then you will need to keep a digital record of the following pieces of data for every sale you make as part of the scheme:
- The value of sales made
- The total output tax on purchases
If your company uses margin schemes, you won’t be required to keep additional records for those schemes in digital form – and you won’t be expected to keep the calculation of the marginal VAT charged in digital form, either. But those records need to be kept in some way.
Is there anything else you need to know about Making Tax Digital for VAT?
Beyond the digital record-keeping changes that will come into force in April 2019, there are a few other regulatory updates included within the Making Tax Digital initiative that your company should be made aware of.
Future updates to the system will enable businesses to provide VAT information to HMRC outside of a VAT Return on a voluntary basis. This new VAT update format won’t include different information from a VAT Return, and more information about how to do this will be available later.
Another future feature businesses can expect to see as part of Making Tax Digital is a voluntary supplementary data submission system, that will allow companies to submit extra information to support the summary data outlined within their VAT Returns.
Finally, there’s the issue of agents. Under Making Tax Digital, your company will still be allowed to authorise HMRC to receive data or send data to an agent acting on your behalf. Once you’ve told HMRC about your approved agent and given them all the information they need to move forward, your agent can then sign up your business to services they need to create, view, edit and send your data to HMRC on your behalf.
Your agent will also be authorised to keep and maintain digital records on your behalf, and that is okay under the new regulations. It’s important to note that if you have already authorised HMRC to receive and send your company data to an approved agent prior to April 2019, you will not need to repeat this process after the Making Tax Digital service has been implemented.
You can have as many agents as you want to represent your company in carrying out your Making Tax Digital responsibilities, as long as your respective agents have software of their own or have access to whatever system holds your company’s digital records.
The bottom line
As with the introduction of any new HMRC rules, 2019’s Making Tax Digital initiative sounds a little daunting, but once you delve into the fine print, the new regulations are actually quite straight-forward. Business has slowly been transitioning to a largely digital direction for decades, and so Making Tax Digital is just the next step in bringing HMRC’s services in line with the convenience and efficiency that UK companies deserve.
You’ll be expected to think a bit harder about how you create, share and store digital records, and will need to ensure all your accounting software and systems are compatible with HMRC’s new service. Yet by and large, the chances are your business is already doing some or all of the new tasks that will be required after 1 April 2019.
Just remember: if you have any questions at all about Making Tax Digital, you should contact HMRC for support immediately. And when in doubt, it is always worth seeking the advice of a professional accountant to ensure that your business is doing everything it can to comply with the new rules.
Want to learn more about VAT and limited company tax requirements? Check out the Rapid Formations blog for all sorts of information about how to register for VAT, how to get your company’s Unique Tax Reference and how to inform HMRC of changes within your company.