MTD records: Fact or fiction
Neil Warren shares three myths and three truths about MTD record-keeping.
Advisers and clients are beginning to show an interest in the specific detail about what records they will need to keep in a digital format when MTD starts in April. This is especially important if they join HMRC’s pilot programme, adopting good habits from day one so to speak.
Purchase invoices need to be split into different VAT rates. No this is wrong.
If I buy a VAT book (zero-rated) for £100 and a print cartridge for £50 plus VAT on the same invoice (standard rated), I only need to digitally record the total net figure of £150 and the input tax of £10 that I am claiming. I don’t need to make separate entries for £100 and £50.
If an employee submits an expense claim containing items supported by lots of small receipts, eg for stamps and sandwiches, I need to separately record every receipt.
There is an escape clause in the regulations that a transaction does not need to be recorded digitally if this would be “impossible, impractical or unduly onerous.” I hope further guidance will be issued by HMRC, but I see this expense claim as a classic example of when this concession is relevant. I would record the total net figure and total input tax being claimed in the case of small value receipts, ie one total for the batch.
The only digital requirement for companies in a VAT group is that each member must adopt digital record-keeping.
There is an extra digital process for group registrations, namely that there must be a digital link between the VAT totals for each company to the consolidated VAT return that is prepared and submitted digitally by the representative member to HMRC. This might be done by linking the VAT totals to a consolidated spreadsheet.
However, to quote from Example 6, VAT Notice 700/22, section 7: “During the soft-landing period between 1 April 2019 and 31 March 2020, HMRC will not require a digital link to exist between each group member’s software and the spreadsheet. However, the links between the pieces of software must be digital from 1 April 2020 for the set of software to be considered functional compatible software for Making Tax Digital purposes”
It is not acceptable to make one digital entry for purchases and sales based on a statement amount or payment total.
Many users of the cash accounting scheme post a single cash book entry when a supplier is paid, which might encompass 10 or 20 different purchase invoices, and the input tax claimed might be totalled on a calculator. From 1 April 2019, each invoice within the payment must be separately entered digitally, showing the net and total input tax figures (VAT Notice 700/22, para 3.3.3). HMRC claim this has always been necessary, although it has not happened in practice. The same outcome applies with sales, ie a digital entry must be made for each sales invoice.
There is no problem in entering the digital records for a complete VAT quarter in one session, as long as it is done before the return is submitted.
Industry insightsView more
The ideal outcome for HMRC would be if all taxpayers adopted real time accounting, recording the transactions as they happen, but this won’t happen in practice for many reasons. I act for a mobile caterer who records his daily gross takings figures in a manual book and then posts all 91 days of the quarter to Sage on a Sunday morning, which means he can then submit his VAT return.
A retailer does not need to digitally record every sale he makes.
The first stage of a retailer’s audit trail where MTD is relevant is the daily gross takings figure. So, for example, there is no need for a florist to digitally record every bunch of flowers she sells in her shop (VAT Notice 700/22, para 3.5).
There is no need for businesses which use a margin scheme to digitally maintain their second-hand stock book (VAT Notice 700/22, para 3.8). Flat rate scheme users do not have to record purchase invoices where they are not claiming input tax (VAT Notice 700/22, para 3.6).
HMRC claims that MTD does not change the VAT record-keeping requirements of a business, just the format in which they are kept. This is probably a fair statement although extra detail will certainly be needed in many cases. The challenge is to deal with this extra detail in the most time-efficient manner.
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.