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MTD for VAT: How does the threshold work in practice?

29th Mar 2019
Independent VAT Consultant
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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.

Voluntary registrations

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.).

Replies (24)

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By CJaneH
29th Mar 2019 14:57

Example 4 seems to suggest that a business that would not be issuing detailed invoices, cafes hairdressers, dress shops etc can have sales up to £102,000 before registering for VAT as if you calculate the VAT on the gross it would reduce net sales to below £85,000. Can you confirm.

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Replying to CJaneH:
Quack
By Constantly Confused
29th Mar 2019 16:00

CJaneH wrote:

Example 4 seems to suggest that a business that would not be issuing detailed invoices, cafes hairdressers, dress shops etc can have sales up to £102,000 before registering for VAT as if you calculate the VAT on the gross it would reduce net sales to below £85,000. Can you confirm.

Surely it is any business, detailed invoices or not. Joe Bloggs Ltd selling office equipment to businesses totaling £101,999 per annum is still making net sales of £84,999, just the same as a coffee shop with the same figures.

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Replying to CJaneH:
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By Matrix
29th Mar 2019 16:35

No - they have to register for VAT.

This article is about registering for MTD, it should state as an assumption that they have registered for VAT.

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Replying to Matrix:
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By CJaneH
29th Mar 2019 18:02

Thanks,

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By douglasganderson
02nd Apr 2019 11:13

The article states "March 2019" Does this mean end March 2019 ?

Also if business is on flat rate scheme is the threshold based on the VAT inclusive figure on which the 16.5% output VAT liability is calculated or the net of 20% VAT figure ?

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By cne333
01st Apr 2019 11:39

What are the implications for a client who simply does not bother to sign up? Are there penalties? Or will they find the old portal slammed shut?

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Replying to cne333:
By coolmanwithbeard
01st Apr 2019 11:49

My understanding is that if HMRC recognise you are over the threshold you will lose access to the portal

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Replying to coolmanwithbeard:
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By dl100tr
01st Apr 2019 12:35

Does anyone know how HMRC will monitor this? For instance, in the examples above, the "temporary breach" of the threshold is quoted as an annual figure - but what happens if the pro-rata amount is exceeded in a given quarter? Would that trigger a need to sign up?

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Replying to cne333:
Morph
By kevinringer
01st Apr 2019 14:03

My understanding is HMRC are leaving the existing GOV.UK portal and that businesses have to actively switch to MTD. In time HMRC will be forcing businesses to switch but my understanding is HMRC won't to start with because HMRC doesn't always know which businesses are mandated. I know this is at odds with other answers which goes to show how muddled HMRC's implementation of MTD is.

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By David Winch
01st Apr 2019 12:22

Thank you, Neil. I feel this is the first article that has specifically addressed the "voluntarily registered but remains well below the £85k threshold" with a clear confirmation of what I believed to be the case.

David Winch,
Sales & Marketing Consultant, Cambridge

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By djtax
01st Apr 2019 12:47

...and of course the whole purpose of a pilot scheme is to identify and iron out as many of these basic areas of uncertainty before a project of this magnitude goes live...

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By Carol
01st Apr 2019 14:02

Your note at bottom states Example 1 is a voluntary registration. Can you confirm - if not set up as voluntary currently with income of £60,000 and charging and claiming vat that they can still file return under old gateway?

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By johnjenkins
01st Apr 2019 14:06

In example 5 I presume that Bob can still ask HMRC for non registration status prior to commencing the one-off contract? If granted then he will not have to register for MTD.

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By rmillaree
01st Apr 2019 16:32

for Example 4
"Threshold excludes VAT"
is that correct ? presuming it is correct where does it confirm this in writing in the guidance?

I would have presumed it would have been vat inclusive sales over 85k that was the test not vat exclusive.

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Replying to rmillaree:
Stepurhan
By stepurhan
01st Apr 2019 16:51

Why would you presume that?

It is just operating exactly the same as the registration threshold. A business that is not yet VAT registered will not have VAT in its turnover. Therefore the relevant figure is the ex-VAT amount.

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Replying to stepurhan:
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By rmillaree
02nd Apr 2019 11:16

stepurhan

thanks for your comments

I simply presumed (wrong thing to do) that a business with income of 93k per year that would be obliged to be vat registered were they not vat registered and must remain vat registered due to turnover being above the de-registration threshold would be deemed to have turnover over the vat registration threshold for MTD for vat.
Note my thought were on the basis that a company like this would have the same cash sales total of 93k whether vat registered or not.
Hey Ho bonus if my presumption is wrong.

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By rmillaree
01st Apr 2019 16:32

for Example 4
"Threshold excludes VAT"
is that correct ? presuming it is correct where does it confirm this in writing in the guidance?

I would have presumed it would have been vat inclusive sales over 85k that was the test not vat exclusive.

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By andrew1211
02nd Apr 2019 11:51

Example 2....there has often been debate about whether outside the scope are included in Box 6 or not.....you seem to imply not, but what do others think? Might also be different if on the FRS......

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Replying to andrew1211:
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By rmillaree
02nd Apr 2019 13:11

Hello andrew

Ref example 2 - this article as far as i have read it has nothing to do whether the figures go in the vat return boxes or not ? its purely to do with calculation turnover for mtd purposes.

Note the vat guidance ref box 6 is clear that even though these services are outside the scope of uk vat hmrc want the total included in box 6.
section 3.7 from the link below
https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-va...

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Replying to rmillaree:
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By andrew1211
02nd Apr 2019 14:17

Ok but if I record £1m in box 6 for example all outside the scope aren't HMRC going to 'assume' I need to be in MTD, or will they realise not if they also see Nil in box 1? Or do I just correctly opt myself out of MTD and HMRC take that as gospel until they decide to look more closely.

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Replying to andrew1211:
Morph
By kevinringer
02nd Apr 2019 14:33

Same goes for exempt outputs which are not turnover for MTD purposes but are included in box 6. That's one reason why HMRC can't be certain whether some businesses are MTD mandated or not.

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Replying to kevinringer:
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By andrew1211
02nd Apr 2019 15:55

Really? Interesting....can you point me to the actual guidance that says this please? Many thanks....

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Replying to andrew1211:
Morph
By kevinringer
03rd Apr 2019 09:07

Andrew, guidance that confirms exempt outputs must be recorded in box 6 - see section 3.7 of https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-va....

Guidance that confirms that only taxable items make up turnover for MTD purposes - see section 1.2 of https://www.gov.uk/government/publications/vat-notice-70022-making-tax-d....

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Replying to kevinringer:
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By andrew1211
03rd Apr 2019 09:13

Thank you

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