MTD: The coming VAT challenges

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MTD day is fast approaching - Neil Warren considers some specific VAT challenges that must be considered by advisers before April next year.

The big day is getting closer: as the Steve Wright song on Radio 2 always says: “It’s later than you think”. I am not talking about Brexit but 1 April 2019.

That's the date when all VAT registered businesses trading over the threshold will need to keep accounting records in a digital format and send VAT returns to HMRC by digital means rather than logging into the HMRC website as is current practice. I am not an expert on software (an ‘unexpert’ in fact) but here are some common VAT related questions that I have dealt with in recent weeks.

Retailers and takings records

Since the first day I joined Customs and Excise back in the early 1980s, there has always been a requirement for retailers to keep a record of their daily gross takings.

This has not changed, and if we visited a business in those days that only recorded a weekly total (or in some cases monthly) we dropped them a polite letter to remind them about the daily requirement.

Retailers adopting a digital system must continue to record a daily takings figure, either on a spreadsheet (with the mysterious bridging software that no-one is quite sure about providing the digital link) or as a direct posting to the accounting system, either by journal or some other means. (VAT Notice 727, para 4.5)

Record keeping

My comments in the previous paragraph are consistent with a key theme from my recent discussions with HMRC’s press office, namely that MTD is not changing the record keeping requirements of a business, only the format in which they are produced. So here are specific examples:

  • Cash accounting scheme – a requirement of MTD is that a business must process all sales and purchases invoices on an individual basis. This could prove to be a challenge to many current users of the cash accounting scheme, who usually just post one entry for a payment or receipt. I have a client in my private practice who uses a subcontractor who raises sales invoices on a job basis so each monthly payment she makes to him will be made up of 20 or 30 invoices. HMRC’s observation is that a scheme user such as my client has always been required to process all sales and purchase invoices separately (to ensure the correct output tax or input tax figure is calculated), so this is not a new outcome with MTD.
  • Flat rate scheme – good news to report here. There is no need to digitally process purchase invoices unless input tax is being claimed, which is only for expenditure on capital goods costing more than £2,000 including VAT: “HMRC is not making changes to VAT schemes as part of MTD,” said the press office spokesperson.

Which businesses must join MTD?

I was impressed with VAT Notice 700/22, recently published by HMRC about MTD, and an important read for all advisers. However, there is a misleading comment at para 2.2: “Only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital.” This is incorrect – it is all about annual taxable sales when MTD starts in April 2019 and on a rolling 12-month basis thereafter.

Once the rolling 12-month taxable sales figure exceeds £85,000, then a business must adopt digital record keeping. This statement is clarified in para 12.15 of the stakeholder communications pack (tinyurl.com/yb74f6kk). So if you have any clients who used to trade over the threshold in the past but now take life easier and permanently trade below £85,000, they will have no MTD worries.

Finally, don’t forget that the £85,000 joining figure excludes exempt income and outside the scope sales eg most B2B sales of services to non-UK customers. It is only those sales that are charged at 0%, 5% or 20% VAT that are included in the figures.

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.

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By Robbo
20th Aug 2018 11:51

Nothing like government simplification, massive increase in the amount of time & business costs for those on cash accounting.
Trust HMRC .

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20th Aug 2018 12:47

the Steve Wright song on Radio 2 always says “It’s later than you think”.

Simon Mayo not Steve Wright!

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to paulgrca.net
20th Aug 2018 13:30

Surely its the Jools Holland song, played by Simon Mayo?

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20th Aug 2018 13:23

Neil, you say "Cash accounting scheme – a requirement of MTD is that a business must process all sales and purchases invoices on an individual basis". I can't find this in 700/22. Could you point me in the correct direction please.

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20th Aug 2018 13:25

Neil, re the subcontractor you mention, would this meet the requirements of 3.3 .2.1 "Where a third party agent makes supplies on your behalf, those supplies do not fall within the digital record keeping requirements until you receive the information from the agent. Where the information is received as a summary document you can treat this document as one invoice issued by you for the purpose of creating your digital record."

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20th Aug 2018 13:37

Talking about Bridging Software, I have been consulting a software company that are testing 'Bridging Software' already which will be a spreadsheet add-in which can be linked up to any excel multi-tab spreadsheet. This will then connect to their website and pull through the 1-9 vat boxes for filing through the website.

Their website is http://filemyvatreturn.co.uk/ and you can register your interest to be kept in the loop.

Bridging software will be used for compliant spreadsheets, partial exemption and complex VAT schemes, VAT groups and other areas of VAT where the spreadsheet is still the best software to use

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20th Aug 2018 13:37

Talking about Bridging Software, I have been consulting a software company that are testing 'Bridging Software' already which will be a spreadsheet add-in which can be linked up to any excel multi-tab spreadsheet. This will then connect to their website and pull through the 1-9 vat boxes for filing through the website.

Their website is http://filemyvatreturn.co.uk/ and you can register your interest to be kept in the loop.

Bridging software will be used for compliant spreadsheets, partial exemption and complex VAT schemes, VAT groups and other areas of VAT where the spreadsheet is still the best software to use

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to McCaigue01
20th Aug 2018 14:48

Thanks for that. I would want something (ideally off line and on paper with nothing in the cloud although no chance of that) though that does not involve my sending any confidential data to any third party other than HMRC. I don't even use cloud storage and love my paper accounts.

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to EnglishRose
20th Aug 2018 15:08

My understanding is that none of the bridging software (the spreadsheet linking software) is cloud: all of it links your spreadsheet (stored on your PC) with HMRC direct.

I also understand that most of the MTD bookkeeping software is cloud based but there are some non-cloud versions eg Sage do a desktop (non-cloud) versions as well as a cloud version.

So that's your off line requirements sorted but unfortunately there's no chance of paper: digitising transactions is a fundamental requirement of MTD. Please note that digitising doesn't mean cloud.

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to EnglishRose
20th Aug 2018 15:11

As there are probably thousands if not hundreds of thousands of business owners still using spreadsheets (bear in mind they will all be different) the only real solution to keep those business still using their bespoke excel workbooks is to build an add-in which can be linked up to their digital records... you could use an API enabled spreadsheet which has been built specifically for filing VAT however you will likely loose the flexibility that your current spreadsheet offers you. What we've been working on with http://www.filemyvatreturn.co.uk/is a universal tool which can be incorporated into any spreadsheet- within the add in will be a declarations and submit button. This will then take you to their website (where you will have a login) and upload the box 1-9 figures from your spreadsheet automatically for you which will enable you to file and receive confirmation of submission as with any other software.

As long as the spreadsheet is compliant with https://www.gov.uk/government/publications/vat-notice-70022-making-tax-d... see 3.2 then the add-in will be a simple solution

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20th Aug 2018 15:58

Neil - did you challenge HMRC on their interpretations ?

They are known to make stuff up from time to time.

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21st Aug 2018 08:39

Thank you Neil. On another post someone who had read your article in Taxation magazine told us about needing to record each underlying transaction for cash accounting purposes, rather than just blocking together payments for batches of invoices.
I just wish HMRC had made it clear much earlier that they're no longer happy with actual custom and practice.

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to Moonbeam
20th Aug 2018 17:56

6% ?

Do you fancy editing that ?

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21st Aug 2018 10:02

I can't believe so many people are spending so long analysing all this stuff. I

s there sufficient money in doing so? How much do AW etc pay for articles? I doubt it is anything commesurate with a day rate let alone an hourly rate.

Personally, I thought reading the hundreds of pages the government produce every day was the domain of people who work for CIOT on a salary.

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to AnnAccountant
21st Aug 2018 10:52

MTD will affect us all. Clients are going to need a lot of support so those of us taking MTD seriously are reading all we can because there's very little concrete info coming out of HMRC. I completely oppose MTD but I've still got to know what it is and how it will impact my clients.

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to AnnAccountant
21st Aug 2018 12:45

AnnAccountant wrote:

I can't believe so many people are spending so long analysing all this stuff. I

s there sufficient money in doing so? How much do AW etc pay for articles? I doubt it is anything commesurate with a day rate let alone an hourly rate.

Personally, I thought reading the hundreds of pages the government produce every day was the domain of people who work for CIOT on a salary.

You've a shock to come, Ann. For those clients affected, this is much bigger than the introduction of Self Assessment.

If you think that "those who work for CIOT on a salary" will be able to sort out John the Plumber's bookkeeping, I believe you to be sadly mistaken.

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23rd Aug 2018 18:32

Apparently, we're left with the previously unheard of prospect of micro-businesses with turnovers of less than £100000 being compelled to keep full double entry books.

What does the Office of Tax Simplification say about this ?

Nothing ?

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to lionofludesch
26th Aug 2018 12:06

What does the Office of Tax Simplification say about this ?

The so-called office of Tax Simplification has absolutely nothing to say about actually simplyfying the system - which could only be signalled by Tolley's reducing the number of pages.
What it concentrates on exclusively is simplifying the collection of extant taxes as seen from HMRC's viewpoint.
The actual practicalities and reduction in overhead by busineses in doing HMRC;s work for them is the furthest thing from their minds [sic].

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26th Aug 2018 23:57

Is there free software to use, I work with small businesses who aren’t happy about paying for something that was free?

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to 1983debz
27th Aug 2018 10:16

I'm not aware of any free software. HMRC said there would be some, but they aren't developing any. I've read HMRC's specs for the free software and it excludes VAT. That doesn't mean there won't be any but we need to keep in mind that all MTD software is being developed by commercial developers. All will incur costs. How will they recover their costs if they were to release free software? Maybe the software will contain adverts? Maybe the support phone number will be a premium rate number? At the end of the day I can't see the 'free' software being completely free.

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to 1983debz
27th Aug 2018 10:25

1983debz wrote:

Is there free software to use, I work with small businesses who aren’t happy about paying for something that was free?

We should deluge HMRC with enquiries for this free app that keeps your books - all you have to do is take a snap of all your bills with your phone.

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to 1983debz
29th Aug 2018 11:29

Spreadsheets are free to use (well kinda)?

Integrate with bridging software and pay around £10 per VAT return filed (not free but a lot cheaper than paying for monthly software)

As mentioned earlier register your interest with http://www.filemyvatreturn.co.uk/ and they will keep you in the loop as to how vatMTD will work for spreadsheets

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27th Aug 2018 10:06

Hi As per below regarding flat rate scheme are you saying that flat rate users who do not claim vat on purchases are not required to go on the MTD scheme at all which includes sales invoice input .

Or If we do have to put sales through MTD then you might as well put the purchase invoice through as well as why would you want to put sales on MTD and purchase on another record keeping system ...

Sorry but I’m a very small business owner and serious confused on the whole MTD situation.

“Flat rate scheme – good news to report here. There is no need to digitally process purchase invoices unless input tax is being claimed, which is only for expenditure on capital goods costing more than £2,000 including VAT: “HMRC is not making changes to VAT schemes as part of MTD,” said the press office spokesperson.”

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to rakepat366
27th Aug 2018 10:21

rakepat366 wrote:

Hi As per below regarding flat rate scheme are you saying that flat rate users who do not claim vat on purchases are not required to go on the MTD scheme at all which includes sales invoice input .

No - you're stuck with MTD too. But you only have to record sales and capital purchases over £2000.

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to rakepat366
28th Aug 2018 13:47

MTD requires you to digitise what you are already required to record for VAT. Currently you are required to record (1) all your outputs and (2) inputs costing more than £2000 including VAT. MTD requires the same: nothing more and nothing less.

Currently, some FRS businesses will chose to record all their inputs because they need them for income tax purposes. Businesses may make the same decision with MTD for VAT.

We must remember that in 2020 (or later) MTD for Income Tax will start and businesses will be required to record everything: all income and all expenses, whether there's VAT or not.

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to kevinringer
28th Aug 2018 17:29

kevinringer wrote:

MTD requires you to digitise what you are already required to record for VAT. Currently you are required to record (1) all your outputs and (2) inputs costing more than £2000 including VAT. MTD requires the same: nothing more and nothing less.

Currently, some FRS businesses will chose to record all their inputs because they need them for income tax purposes. Businesses may make the same decision with MTD for VAT.

We must remember that in 2020 (or later) MTD for Income Tax will start and businesses will be required to record everything: all income and all expenses, whether there's VAT or not.

Well, I agree with you Kevin. However, the fact is that HMRC clearly do not.

And I reckon that a defence of "Well, Kevin Ringer agreed with me an Aweb" won't carry a lot of weight at a Tribunal.

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to lionofludesch
29th Aug 2018 08:43

lionofludesch wrote:

And I reckon that a defence of "Well, Kevin Ringer agreed with me an Aweb" won't carry a lot of weight at a Tribunal.


No, but my defence "lionofludesch agreed with me" will ;-)
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to kevinringer
29th Aug 2018 09:38

Fair point, well made.

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28th Aug 2018 12:12

I have a client, a boarding kennels, on the FRS, and we were planning to use FreeAgent to capture the sales as they appear on the bank feeds which, as they are mostly credit card sales (or cash/cheque deposits into the bank), would be an agglomeration of several sales. Are they actually going to want the individual sales to each customer recorded ?

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to Barkster
29th Aug 2018 09:39

Barkster wrote:

I have a client, a boarding kennels, on the FRS, and we were planning to use FreeAgent to capture the sales as they appear on the bank feeds which, as they are mostly credit card sales (or cash/cheque deposits into the bank), would be an agglomeration of several sales. Are they actually going to want the individual sales to each customer recorded ?

Maybe. It depends.

Can you identify each customer electronically from the back-up blurb you get? Can you treat these as retail sales ?

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to lionofludesch
29th Aug 2018 10:09

Only users of VAT Retail Schemes can record Daily Gross Takings instead of individual sales - see https://www.gov.uk/government/consultations/making-tax-digital-reforms-a.... You can only use VAT Retail Schemes for the sale of goods - see https://www.gov.uk/vat-retail-schemes. The boarding kennels is a service, not goods, so you can't use a VAT Retail Scheme therefore you cannot get away with just recording Daily Gross Takings. You will have to record each sale.

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to kevinringer
29th Aug 2018 10:30

Which is, of course, a nonsense where all sales are at the same rate.

I have a client with a couple of thousand warranties on a monthly basis. All standard rated. But now they need to be recorded separately.

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to lionofludesch
29th Aug 2018 10:47

A nonsense indeed because though MTD requires separate recording of each transaction there's no way HMRC can check if that has actually occurred eg if the businesses uses spreadsheets the linking software merely links to the totals and has no way of checking whether that total is of a list of each transaction, or of the daily totals or indeed whether it is merely a total for quarter from paper records. There's going to be a huge gap between what HMRC expect and what businesses will do to submit their VAT return, I mean VAT submission.

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to kevinringer
29th Aug 2018 11:31

kevinringer wrote:

Only users of VAT Retail Schemes can record Daily Gross Takings instead of individual sales - see https://www.gov.uk/government/consultations/making-tax-digital-reforms-a.... You can only use VAT Retail Schemes for the sale of goods - see https://www.gov.uk/vat-retail-schemes. The boarding kennels is a service, not goods, so you can't use a VAT Retail Scheme therefore you cannot get away with just recording Daily Gross Takings. You will have to record each sale.

For membership organisations with tens of thousands members, does that mean any membership fees paid would need to be recorded individually?

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to Smalltalk
29th Aug 2018 12:18

Yes - section 3.3.2 of https://www.gov.uk/government/publications/vat-notice-70022-making-tax-d...

'For each supply you make you must record ...'

Section 3.5 permits recording of Daily Gross Takings, but this is for retail schemes only and retail schemes can only apply to goods and not services.

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to kevinringer
29th Aug 2018 12:24

kevinringer wrote:

'For each supply you make you must record ...'

Section 3.5 permits recording of Daily Gross Takings, but this is for retail schemes only and retail schemes can only apply to goods and not services.

Hairdressers are going to be fun, aren't they ?

I'm thinking that Retail Services is an area which needs urgently looking at. Though I'm not sure the definition for MTD is the same as the definition for Retail Schemes in the traditional sense.

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29th Aug 2018 10:44

For those with masses of transactions that all get paid into the bank accounts, have a look at Xero or Quickbooks "cash coding" - can batch process hundreds of transactions in seconds.

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to David McCaigue
29th Aug 2018 10:50

Bank rules - Sage 50cloud (ie the desktop product) has bank rules. Sage Business Cloud Accounting will also have it soon.

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to kevinringer
29th Aug 2018 11:20

Sage Business Cloud is a very poor product considering how amazing line 50 has been.

It is not a simple case as bank rules as you still need to "okay" each transaction... in cash coding you are basically using the software like a spreadsheet with filters on, which enable you to process 100's of transactions at once.

Bank rules in this instance would be a must but then you need cash coding to automatically post up the transactions once complete

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to David McCaigue
29th Aug 2018 11:03

David McCaigue wrote:

For those with masses of transactions that all get paid into the bank accounts, have a look at Xero or Quickbooks "cash coding" - can batch process hundreds of transactions in seconds.

Needs setting up, though. My client expects to waste hundreds of hours transferring from his existing system to the new software which he only needs to satisfy HMRC.

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29th Aug 2018 12:14

A prospect retailer client has about 40 invoices per about 5 suppliers and they provide a monthly statement, showing clearly the gross net and VAT. I am assuming it will be OK to enter that statement as an invoice- as long as that's what gets paid -as a means of splitting the VAT instead of entering each item.

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to Moonbeam
29th Aug 2018 12:29

I guess this is the point of Neil Warren's article - you have to record each purchase. I've not read the article but have referred to 3.3.3 of https://www.gov.uk/government/publications/vat-notice-70022-making-tax-d...

'For each supply you receive you must record ...'

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to Moonbeam
29th Aug 2018 12:33

Moonbeam wrote:

A prospect retailer client has about 40 invoices per about 5 suppliers and they provide a monthly statement, showing clearly the gross net and VAT. I am assuming it will be OK to enter that statement as an invoice- as long as that's what gets paid -as a means of splitting the VAT instead of entering each item.

I'd be assuming it wasn't OK. A statement isn't an invoice.

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31st Aug 2018 11:49

Does anyone know of software which is going to cope with submitting a VAT return via MTD with a retail scheme in place ?
Presumably you will need the ability to adjust the VAT return figures prior to submission
All being done on a spreadsheet at the moment.
Kashflow support were vague - the person who might know the answer is on holiday. Lucky them.

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to Barkster
31st Aug 2018 11:56

Barkster wrote:

Does anyone know of software which is going to cope with submitting a VAT return via MTD with a retail scheme in place ?

Or Partial Exemption ?

Or TOMS ?

Or a dozen other non-standard situations ?

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