HMRC’s latest MTD policy update means that supplier statements can now be used to record expenses for input tax purposes: a big time saving for many businesses that adopt spreadsheet accounting. Neil Warren has the details.
Recording purchase invoices
MTD for VAT was introduced for all UK businesses making annual taxable supplies of more than £85,000 for VAT periods beginning on or after 1 April 2019.
A controversial policy of HMRC has always been that a business using, for example, the cash accounting scheme and spreadsheets to digitally record their expenses had to record every single purchase invoice in a digital format, even though the business might make a single payment to a supplier based on a statement covering perhaps 40 or 50 different invoices.
It would be sensible for the business to just make a one-line entry on the spreadsheet based on the payment total. With the cash accounting scheme, input tax is only claimed when payments are made to suppliers. That policy has now changed.
Updated public notice
VAT Notice 700/22 has been updated a number of times this year as HMRC’s policy on MTD has evolved but the latest update on 5 May 2019 is very welcome because it means that supplier statements can now be used to record expenses for input tax purposes – a big time saving for many businesses that adopt spreadsheet accounting.
However, if the statement comprises invoices at more than one rate of VAT, the individual totals relevant to each VAT rate within the payment must be recorded separately (see VAT Notice 700/22, para 184.108.40.206).
Gary the decorator buys all of his paint from ABC Paint (standard rated). He also buys decorating manuals from the same supplier (zero rated). In April 2019, the supplier statement showed a total payment due of £1,300, consisting of £100 of manuals and £1,200 of paint.
Gary is VAT registered and uses the cash accounting scheme and he records his expenses on a spreadsheet, which tracks the entries on his bank statements (he does not deal in cash). Following HMRC’s change of policy, he can make a digitally accounting entry as follows:
- Paint £1,000
- Manuals £100
- VAT £200
- Total payment £1,300
Petty cash expenses
The updated notice has also confirmed that petty cash expenses can be posted as a single total, as long as no individual receipt within the posting exceeds £50 and the total of all receipts does not exceed £500 per entry. Both figures are VAT inclusive (see VAT Notice 700/22, para 220.127.116.11)
To be honest, I have always told accountants I advise that this approach with petty cash expenses is fine because there is a clause in the legislation which says that MTD accounting is not necessary where it is ‘impossible, impractical or unduly onerous’. This definition perfectly fits petty cash expenses. And, in reality, HMRC rarely shows an interest in petty cash expenses – officers are much more interested in, say, fixed asset additions or land and property transactions.
MTD progress report: Where are we now?
I have been getting feedback about early MTD return submissions and quite a few clients have had their initial submissions rejected by HMRC, with a comment such as it “failed HMRC data checks” but then persistence has paid off with the return eventually being accepted. One client raised a more worrying point:
“Despite registering the software with HMRC and doing everything else I thought needed to be done there was one final verification that HMRC needed before it would accept the return. It wasn’t easy to find and the support from the software company was woeful – I had to work it out via google and my own wits.”
Hopefully, by the time that the first compulsory returns are due by 7 August (for businesses on quarterly returns and covering the June 2019 quarter), these teething problems will be in the past. But I suggest that you encourage clients to submit returns a few days before the August deadline to avoid any last-minute problems. And if it does go wrong, they should still make sure the VAT is paid on time to avoid any default surcharge horrors.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.