MTD records: Fact or fiction

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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.

Myth one

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.

Myth two

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.

Myth three

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”

Fact one

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.

Fact two

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.

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.

Fact three

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).

Conclusion

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.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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12th Nov 2018 15:10

Thank you.

This gets to the heart of my objection (as a paper records person). I want to maintain all the huge detail in my accounts where there are no space limitation, no set boxes to complete or anything like that. So I would want to divide out the petrol at the garage but not the bun. I don't want a software product forcing my records to be worse than they are. So if I can find a free bridging software for excel I suppose I can keep the paper records and then once a quarter move data on to excel and then upload (massive waste of effort to no good end and I hope I can find ways to pay less tax within the law to compensate me for the massive waste of my time but that's a separate issue).....
What I want now is HMRC to write to me (they have not as yet). I want them to tell me say three (no more than that as I don't have time for choices) providers who will offer free bridging software from excel and go nowhere near the cloud.

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to EnglishRose
12th Nov 2018 16:11

I love and adore paper records. There is something honest and transparent about paper records affording us integrity and probity and humility.

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to EnglishRose
13th Nov 2018 13:06

TaxCalc are now offering a MTD compliant VAT filer - for which you can export .csv files into their system and report to HRMC - so should tick all the boxes for digital recording and software links

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to sussieads
15th Nov 2018 15:49

Thank you.
It looks okay https://www.taxcalc.com/vat#Features
£75 for me I suppose it won't be a one off fee( I never buy much that is on going even cars and never software as I like to pay once forever but I expect it's 75 a year).

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12th Nov 2018 16:15

Over the years I have found Batman to be extremely petty applying unremitting diligence to find fault with records. He is obsessed with his inputs and outputs.

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12th Nov 2018 18:30

I like the contradiction between fact one

"a digital entry must be made for each sales invoice."

And fact three

"A retailer does not need to digitally record every sale he makes"

Well which is it!?!!?

Many online business who take very small but frequent transactions (eg ingame currency) have "invoices" but you only put in the daily or weekly (or even quarterly) totals as it would be bonkers to try and book 1000's of 'customer' records into the accounting system when you can just follow the cash and sort at the year end.

The audit trail is there if anyone wants to see it.

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to ireallyshouldknowthisbut
14th Nov 2018 12:10

It's not a contradiction it's an concession for retailers who may have many hundreds of sales in a day which would make the system too onerous. Interestingly in the consultation this was only open to retailers with a t/o under I think £1m and they had to apply for it. In my submission I said whilst I valued the concession to insist they have to apply was a pointless trap for the unwary. Looks like they listened haha.

INterms of the small transactions you mention then how are they bought? If the platform keeps the required individual records (which may also be needed for currency and VAT MOSS reasons) then as long as a summary is transmitted to say QuickBooks digitally (and that could be direct or via a spreadsheet as long as not cut and paste and no re-keying) then your records would be OK. No where does it say that all the digital records have to be on the same system.

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12th Nov 2018 20:55

HMRC are a clueless bunch of wallies. Every January their stupid database crashes under a - compared to MTD - low volume of self-assessment submissions.

Submit stuff in the way that makes sense to you, ignore the drivel and the threats HMRC are spouting, keep your head down and off their radar screens.

Job done. Sod off HMRC with your daft systems!

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to mr. mischief
13th Nov 2018 08:33

That won't work though as they will probably turn off the ability for people to file VAT returns in the usual way in April or in due course after that.

The pointlessness of it is to start we are just sending the same 9 boxes of end sums for the first year so all this having to spend a second thinking about it, buying new software etc is a waste of time. When they ban bridging software that will be the crunch point.

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to EnglishRose
13th Nov 2018 10:38

I didn't say I was going to file in the usual way, I am not going to.

I am going to the absolute bare minimum necessary to tick their stupid MTD box. Not an iota more.

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By DJKL
13th Nov 2018 10:25

Neil, thanks for above, a really useful summary.

I did, having read the legislation, suspect that there was no easy solution for my clients using excel as a cashbook, your Fact 1 now fully confirms that view.

So my bespoke, in use by my clients, retailer excel workbooks, whilst compliant on the income side (boxes for each day's takings plus analysis re how taken) are not readily going to be compliant on the payment side.

It appears it is time for these clients to be weaned onto actual accounting software with a PDB/PL. The big question is whether it is worth my while my learning new software to teach them or perhaps, in the words of Frank, early retirement does indeed loom.

"And now, the end is near
And so I face the final curtain
My friend, I'll say it clear
I'll state my case, of which I'm certain
I've lived a life that's full
I've traveled each and every highway
And more, much more than this
I did it my way"

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to DJKL
13th Nov 2018 11:33

I would wait and see what the penalties are before you change your systems.

They are not in the finance bill, so cant be coming in until at least April 2021.

No penalty, no need to worry.

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By DJKL
to ireallyshouldknowthisbut
13th Nov 2018 12:56

I am not going to change systems, merely my life.

I will leave you lot to correct digital messes created by the average smaller client and will only deal with those clients where there is sufficient fee level > £5k to justify them taking me on as bookkeepe/ in house accountant/ FD all rolled into one. In effect a PT practice replaced with 3-4 part time employments.

I just can't see me being so laid back re penalties, the legislation says do something, whether there is a penalty or not a penalty that something is still enacted law that states digital records have to record x,y and z to be compliant with the Act, I cannot see my honestly telling clients to ignore the legislation as HMRC currently have blunt teeth.

http://www.legislation.gov.uk/uksi/2018/261/regulation/7/made

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to DJKL
14th Nov 2018 10:13

Sounds like what TM is going to say to her cabinet this pm.

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14th Nov 2018 10:10

Having recently taken the plunge and started using QuickBooks Online I now get the client to send a.csv file which is uploaded and use to populate bank payments and receipts. Fairly easy so far. My (huge) concern is that for builders who buy items on 50+ invoices per month but pay on one statement will have this as one payment on the bank records. Where is the digital input of all the 50 invoices going to take place? Am I to obtain a .csv from the supplier and start running a bought ledger? Or am I just (quite possibly!) extremely thick?!

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to Alanpryan
14th Nov 2018 10:27

I had another thought on this matter. What about all the clients I have put on to Sage One Start, the basic version where you can only create sales invoices and it has no purchase ledger. Does this mean Sage are selling something that is useless and the only way to be compliant is buying their £20+ per month package to add the purchase invoices or will I need to keep two records somehow? I purchased the Sage One starts for the bank feeds solely because they were £1 each and we could get all the bank data in while saving a lot of time but now they could become no good for any VAT clients.

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to PennyPincher
14th Nov 2018 10:34

Whatever happens it's going to cost. That my friends is FACT.

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to johnjenkins
14th Nov 2018 21:04

Such harsh words. Did you not hear Theresa Middleton try and spin the phrase ‘opportunity cost’ to the Lords Select Committee three weeks ago? It sounded too good to refuse (almost). MTD is a huge cost to small businesses in these already uncertain times. Last thing they need, but trust HMRC to provide that very last thing.

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to PennyPincher
14th Nov 2018 12:14

If there is no Purchase Ledger then it is not suitable for standard accounting VAT clients. It may be fine for clients on the FRS scheme though where there is no requirement to record purchase invoices under MTD for VAT.

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to Alanpryan
14th Nov 2018 10:55

Try using ReceiptBank - or AutoEntry - these are apps that allow the client to photo his invoices and then it will automatically post into QuickBooks. We have used this successfully for over 2 years now and the time saving is enormous. It also pushes the onus back to the client to ensure they have claimed all their receipts. The apps generally work on a smartphone, can be scanned in, dropboxed etc. Most of our clients are more than happy to do this - and it saves them substantial bookkeeping fees. QuickBooks itself also has the ability to take a photo on a smartphone and be recorded automatically in the system - but the user will have to enter the value details in that case.

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to Alanpryan
14th Nov 2018 12:58

In the article Neil points us to section 3.3.3 supplies received in the VAT notice to justify his claim. According to this notice the reporting requirement for relevant supplies is to record:

1. Time of supply( tax point) which for cash accounting is the date of payment
2. Value of the supply
3. Amount of input tax claimed.

Assuming the client keeps copies of the separate invoices showing on the monthly statement to support, then surely you are complying with the notice by just recording the one payment in Quick books ?

Have I missed something?

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By DJKL
to killer33
15th Nov 2018 15:33

Yes, each "supply" is to be recorded is the digital records and the "supply" is the individual invoice.

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By SXGuy
to Alanpryan
19th Nov 2018 08:33

Then id suggest looking at other software or learning QB more.

Personally one payment for bulk invoices isn't an issue for me.

My software allows me to tag that payment to multiple invoices.

If someone makes a payment on account I can also assign it to the supplier account or pay down invoices etc.

The link is the payment towards the supplier receipts. It doesnt have to be a separate bank transaction.

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By JD
14th Nov 2018 10:40

Sorry Neil, but MTD significantly changes the requirements - Many small businesses use cash accounting, Rebecca B has recommend the solution of using QBO and bank feeds for many of these smaller business's, HMRC inspectors have accepted VAT claims for years based on statements paid. Respectfully this change of requirement and the need to then pay Receipt Bank, the like in addition to QBO/Xero, along with more of our time (rather than time saved) will be a significant burden to smaller clients.

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By Peter-S
14th Nov 2018 11:24

I'm just thinking about a cash accounting client that factors everything. They get a quarterly statement that helpfully details the total invoices that have been paid so for output just total those and hey presto, sales income. The client currently has a manual cash book but as invoices are passed to the factors her record of sales is logging in to their account. Presumably then to comply with every invoice being recorded for mtd we know need to hope that we can download a csv file or something similar to input that in to the Quick Books package that she has recently acquired. She is already a less than impressive bookkeeper and struggles with payroll on computer. This is going to be entertaining then!

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14th Nov 2018 13:38

I for one am going to ignore this mindless drivel and see what happens. Where it makes sense to do the books from a bank statement download that is what I am going to carry on doing.

At least I assume that will be the case. All clients where the records are currently done in this way will have the exciting opportunity to move on to QBO instead. Somehow I expect few of them to take this up given the extra software and accountancy costs.

Over the past 10 years the level of tax enquiries in my practice has been 0.9% i.e. in any given tax year, a given client has been 0.9% likely on average to see one.

HMRC has gone after nearly £500,000 in extra taxes and penalties in these enquiries. They have achieved £105.00. My submissions under MTD will tick their silly boxes, if they want me to change tack they'll have to get off their arzzes, come out here and try and make me.

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14th Nov 2018 16:23

Certainly para 3.3.3 says each supply has to be entered separately, but that paragraph is not in a box which has the force of law. Therefore my reading is that HMRC would like us to enter every invoice but the law does not require it. Please would someone explain to me why I am wrong.

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By DJKL
to StephenGuy
15th Nov 2018 15:48

No, but it is based on this law, see sub 3(b)

The Value Added Tax (Amendment) Regulations 2018

Amendment of the Value Added Tax Regulations 1995
7. After regulation 32 insert—

“32A Recording and keeping of information in electronic form

(1) Subject to regulation 32B a taxable person shall keep and maintain the information specified in paragraphs (2) and (3) in an electronic form (“the electronic account”).

(2) The information specified for the purposes of paragraph (1) is—

(a)the name of the taxable person;
(b)the address of the taxable person’s principal place of business;
(c)the taxable person’s VAT registration number; and
(d)any VAT accounting schemes used by the taxable person.

(3) Subject to paragraph (4) the information specified for the purposes of paragraph (1) for each accounting period is—

(a)subject to sub-paragraph (c), for each supply made within the period—
(i)the time of supply,
(ii)the value of the supply, and
(iii)the rate of VAT charged;

(b)subject to sub-paragraph (c), for each supply received within the period—
(i)the time of supply,
(ii)the value of the supply, and
(iii)the total amount of input tax for which credit is allowable under section 26 of the Act(1);

(c)where more than one supply is recorded on a tax invoice and those supplies are either—
(i)supplies made which are required to be accounted for in respect of the same prescribed accounting period and are subject to the same rate of VAT, or
(ii)supplies received for which credit is allowable in the same prescribed accounting period,they may be treated as a single supply for the purposes of either sub-paragraph (a) or (b), whichever is relevant;

(d)the information specified in each sub-paragraph of paragraphs (3) and (4) of regulation 32;

(e)where adjustment or correction is made to the VAT account which is required or allowed by any provision of the Act, or any regulations made under the Act, the total amount adjusted or corrected for the period pursuant to that provision or those regulations;

(f)the proportions of the total of the VAT exclusive value of all outputs for the period which are attributable in each case to standard rated, reduced rated, zero-rated, exempt or outside the scope outputs.

http://www.legislation.gov.uk/uksi/2018/261/regulation/7/made

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15th Nov 2018 15:59

The requirement to enter every purchase invoice as a separate line will have a big impact in the pharmacy sector. Every time a shop orders a packet of paracetamol from a wholesaler it appears as a separate invoice; so there can be thousands of invoices per month per shop. The accepted practice in this sector is to enter the analysis as per the wholesaler's statement instead. It works absolutely fine.

If we have to enter every single invoice separately I will have to employ a second accounts assistant. I very much doubt I can justify that to the MD!

I wonder if a scanned version of the statement would suffice as a "digital entry"? Or, even better, are these apps that can scan receipts really that good?

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14th Nov 2018 18:35

The really good news about this MTD drivel HMRC are hitting us with is that, for once, big business is going to be more affected by little business.

I've worked in various £1bn-plus businesses in my career and I can tell you that they all:

1. Did the VAT returns on Excel. For one thing - and this is just one - if you have a subsidiary you have just bought, the odds they use the same software so it is easy peasy to do the Group VAT are less than 5%.

2. Keyed in or scanned in purchase invoices in the most sensible way possible. And where an invoice has 50 line items, that most certainly does not mean 50 lines it means 1, most of the time.

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14th Nov 2018 20:21

My favourite bit so far is that although manual rekeying and "cut and paste" are not allowed, an export and import via csv is specifically allowed.

So obviously
(1) no-one will change the csv file by opening it in Excel
(2) no-one will upload the same csv file twice

As another commentator said, it's straight out of the Golgafrinchan B Ark...

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By DJKL
to Beach Accountancy
15th Nov 2018 15:51

Next budget they are going to suggest we burn down all the forests.

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15th Nov 2018 08:56

We may well completely disagree with it, know it's going to be a shambles and cause untold grieve for our clients and us, but the law is the law.

HMRC have said this is the law from 01/04/19.

Either you are a professional accountant who will always strive to do things right or you are not.

If you do not obey the law then surely that is criminal behaviour and you should certainly not be calling yourself an Accountant.

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By DJKL
to North East Accountant
15th Nov 2018 16:01

I agree, I cannot knowingly advise clients to break the law, however stupid the law.

I, for one, will deal with all this nonsense by stopping acting for smaller clients and just do FD roles for larger SMEs from now until retirement, at least with these I will be day to day hands on rather than correcting nonsense /mistakes because clients will not know what they are doing.

I have already discussed the first client with its likely successor firm (a firm I used to work for), I will see the client this month re their vat and advise my suggested transition.

It is a shame as I have acted for them since about 2005/ 2006 and I also acted, of and on since 1989,for the previous owner of the same business.(Travel Agent)

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15th Nov 2018 13:07

Extract above
'each invoice within the payment must be separately entered digitally, showing the net and total input tax figures'

Ooohh my gosh this will take forever, bit like loading each transaction on Sage.

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15th Nov 2018 13:14

I like that manual rekeying isn't allowed.

How exactly will they be able to detect that?

I will do the minimum necessary extra work to comply with this extra requirement of MTD as my clients won't want to pay for it as they see NO benefit to it at all and just more work.

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