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)
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.