Maxing Tax Digital for VAT: Digital Record-Keeping

In our last post, we looked at the essentials of the new MTD for VAT regime, so in this post, we’re going to take a closer look at the provisions for keeping digital records.

All VAT registered businesses must keep and preserve certain records and accounts.  Under MTD some of these records must be kept digitally within functional compatible software.

Some software will record all VAT records and accounts information.  However, there are some records that by law must be kept and preserved in their original form, either for VAT purposes or other tax purposes. 

Digital records

Cloud Accounting Software is digital and will meet the requirements of MTD for VAT but handwritten cashbooks and ledgers are not digital. 

Spreadsheets and desktop software are not digital on their own, but in association with applicable software, will meet the digital requirement.

Quarterly information required

Businesses must record each individual transaction digitally, to include time of supply, value of the supply and the rate of VAT charged.

For supplies made, it will be necessary to split out supplies that are on one invoice, but which are made at different times or different rates.  For supplies received, the invoice total will be sufficient.

Creating records from bank or supplier statements will not be sufficient and businesses are not required to store invoices and receipts digitally.

If a business types selected data from an invoice into functional compatible software, the invoice must be retained in its original form as the data in the functional compatible software is not a copy of the invoice.

Where a business has functional compatible software that scans the invoices received, puts the information into its ledger and retains an image of the invoice that contains all the detail required for VAT purposes, then it will not be necessary to retain the original invoice unless required for another purpose.

Relaxations

The following relaxations regarding digital record keeping are in place:

• Retail schemes – retailers can record gross daily takings and there is no requirement to have a digital link between the till and accounting system
• Supplies made or received by third party agents – summary information received from third party agent can be used to create third party record, eg letting agent, barrister’s clerk
• Employee expenses – supplies received can be combined on expense claim before creating the digital record.

Further relaxations are expected for petty cash, one-off events run by charity volunteers and expenses claimed by charity volunteers.

Digital Links

If accounting records are maintained in more than one program, there must be digital links between each piece of software.

Digital links include:

• Emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation, for example a partial exemption calculation.
• Transferring a set of digital records onto a portable device, for example a memory stick, and physically giving this to an agent to import that data into their software
• XML, CSV import and export, and download and upload of files.
• Automated data transfer.
• Linked cells within or between spreadsheets – the transfer of information by the use of copy and paste or cut and paste does not meet the requirement for a digital link.

For the first year, HMRC will not enforce the requirement to have digital links in place.

Moving to the new environment

What is not changing?

The underlying VAT rules and the amount of information submitted to HMRC will not change under MTD for VAT. The current filing and payment deadlines for VAT will also remain unchanged.

What do you need to do?

Each entity will need to sign up to MTD for VAT and authorise MTD software with HMRC.

Entities may sign themselves up through their Government Gateway user ID or, as your Tax Agent for VAT, we can initiate the sign-up process which will require a confirmation of the business email address.  Sign up to MTD for VAT will mean that all future communications from HMRC in respect of VAT will be sent digitally.

Window for signing up

Entities should sign up to MTD for VAT after all non-MTD VAT returns have been submitted through the current online filing arrangements.  Confirmation of successful sign up will be required and this may take up to 72 hours.

If entities pay by direct debit, it will not be possible to sign up within 15 working days before a submission deadline, or within 5 working days after a submission deadline.

Software choices

The following alternative software solutions may be considered:

• API-enabled software
• API-enabled software and accounting software
• A single spreadsheet and bridging software
• Multiple spreadsheets and bridging software
• Accounting software, a spreadsheet and bridging software
• VAT groups

We currently support clients using Cloud Accounting Software, which is fully compliant with the digital record-keeping requirements of MTD for VAT and includes bridging software through which the quarterly VAT returns will be submitted direct to HMRC from QuickBooks. We shall be able to enable clients for MTD for VAT from within this software. 

A full list of MTD compatible software providers may be found under the following link:

https://www.tax.service.gov.uk/making-tax-digital-software

Advantages of using Cloud Accounting Software

Digital accounting software has significant advantages over the traditional ways of bookkeeping. 

Digital Accounting allows you to:

• See a clear picture of your current financial position in real-time.
• Have your accounts 100% online, so there’s no software to install and everything is backed up automatically.  Updates are free and instantly available.
• Avoid upfront accounting software costs – upgrades, maintenance, system administration costs and server failures will no longer be an issue.
• Have your bank feed your data directly into your accounts on a dailybasis.
• Take a photo on your phone of a purchase invoice to post it immediately.
• See your results, who owes you money, who you owe to and your business bank balance 24/7, 365 days of the year, from your phone.

Most importantly, cloud accounting will be fully compliant with HMRC and Making Tax Digital for VAT.

In recognition of MTD for VAT being introduced, we have established a sister business called My Accountancy HQ which provides data driven cloud accounting for small and growing businesses.  Further details are to be found at www.myaccountancyhq.co.uk.