MTD for VAT: How does the threshold work in practice?
With the government's Making Tax Digital for VAT scheme now live, Neil Warren works through five examples of businesses who may, or should, join up based on the sales each makes.
Confusion still exists
I recently presented a VAT update webinar, covering a range of VAT topics. At the end of the session, there were six questions from participants about how the £85,000 taxable sales threshold works in practice for the MTD for VAT regime. This is a crucial question and is clearly an issue that is still causing some misunderstanding.
Before I run through the practical examples of how the threshold works, don’t forget these two points:
- Once a business has exceeded the threshold in any rolling 12-month period from March 2019, it must join MTD from the beginning of its next VAT period. If a business submits VAT returns on a quarterly calendar basis (to end of: March, June, September, December) and it exceeds the threshold for the first time in the 12-month period to 31 July 2019, it must join MTD on 1 October 2019, ie for its VAT return for the period to 31 December 2019.
- The business must sign up to join MTD for VAT at least one week before the VAT return is due, or their tax agent can sign up a business for MTD for VAT if they are already authorised to act for that business. HMRC will not sign up businesses for MTD even if the business is already VAT registered. The MTD sign up requires the agent or the business to take positive action, it will not happen automatically.
Example 1: Exclude exempt sales
ABC Properties owns four commercial properties, with annual rent of £30,000 earned from each of them. The rent on two of the properties is taxable because of an option to tax election but the rent on the other two properties is exempt.
Solution: It is only taxable sales that count as far as the MTD threshold is concerned, and the annual taxable sales of £60,000 is less than £85,000. The business does not need to join MTD - the rental income on the two non-opted properties is ignored.
Example 2: Exclude outside the scope
DEF Management Consultants only supplies services to one UK-based customer and one business customer in France, earning annual fees of £50,000 from each client.
Solution: The fees from the French business are outside the scope of UK VAT under the general B2B rule for the supply of services ie the supply is subject to the reverse charge in France. DEF’s annual taxable sales are £50,000, ie less than the MTD threshold.
Example 3: Include zero-rated income
Homeless Charity sells donated goods from a shop (annual sales are £60,000) and also has a small coffee shop in a separate building with annual turnover of £40,000 excluding VAT.
Solution: Total annual taxable sales exceed £85,000 because the zero-rated shop sales are still taxable, albeit at a rate of 0%. The charity must join MTD for its first VAT period beginning on or after 1 April 2019. This example also highlights the important point that charities do not get special treatment or exemptions as far as MTD is concerned.
Example 4: Threshold excludes VAT
A vegan restaurant has daily gross takings of £1,800 per week.
Solution: The above figure includes VAT – the weekly takings excluding VAT are £1,500 ie £78,000 a year and therefore less than £85,000. The business does not need to join MTD.
Example 5: Temporarily breach of threshold
Bob the Builder is VAT registered and usually has annual turnover of £60,000 from labour only work. In the 12-month period to 31 July 2019, his annual turnover was £90,000 because of a one-off job in July that meant he also supplied a lot of materials to his customer. His future turnover will revert to £60,000 a year.
Solution: Bob must join at the beginning of his first VAT period starting after 31 July 2019 and cannot withdraw in the future, even though his turnover will fall below the threshold again. The only way of avoiding MTD will be if he deregisters from VAT, which he will be entitled to do after 31 July because his taxable sales in the 12-months thereafter are expected to be less than the deregistration threshold of £83,000.
The businesses in examples 1 and 2 above are registered for VAT on a voluntary basis; their annual taxable sales are less than £85,000. This is why they are excluded from the need to register for MTD for VAT.
However, voluntarily registered businesses can join MTD for VAT if they wish, and the good news is that if they join and don’t like the MTD world, they can subsequently withdraw and revert to non-digital record keeping and submit their VAT returns using the old HMRC portal (see VAT Notice 700/22, para 2.1.1.).