From 1 April 2021, HMRC has introduced additional requirements to Making Tax Digital for VAT (MTDfV), impacting the first VAT return with a period commencing on or after this date.
As a reminder, Making Tax Digital is part of HMRC’s aim to digitalise financial records and the flow of information between individuals, businesses and HMRC.
1. What were the requirements prior to 1 April 2021?
VAT was the first tax to be digitised by HMRC under a two-phase process. The first phase under MTDfV was considered a ‘soft landing’ period and came into effect from April 2019. Businesses with an annual turnover greater than the VAT registration threshold were required to submit their VAT returns directly from a compatible software. Final VAT return figures could no longer be inputted via your Government Gateway account, but instead the return would be submitted from a suitable accounting software or an Excel connector tool commonly referred to as bridging software.
During the ‘soft landing’ period, there was no requirement to digitally link records from different systems and some businesses with complex accounting or non-compliant systems used bridging software to submit total figures to HMRC.
2. What does the new phase for MTDfV involve?
It is now a requirement for businesses to have ‘digital links’ between different software products, with copying and pasting of data no longer allowed when submitting VAT returns directly from a compatible software.
Initially the second phase was planned for April 2020, however due to the COVID-19 pandemic, this was delayed by a year and instead applies for VAT periods starting on or after the 1 April 2021.
3. Who is affected by this change?
Businesses, individuals and charities who are VAT registered and have a taxable turnover above the VAT registration threshold of £85,000 may be impacted by the changes.
Many businesses were fully compliant with the second phase of MTDfV as they already used fully compliant accounting software or changed their accounting processes during the ‘soft landing’ period to digitalise accounting their records.
Businesses most likely to be impacted are those operating bespoke accounting software packages, multiple non-integrated software packages or non-UK software for group accounting purposes without digital links to the final VAT submission.
4. What is a digital link?
A digital link is where a transfer or exchange of data is made (or can be made) between software programs, products or applications.
Individuals and businesses will need to ensure that there is a clear digital link from the initial recording of the source transaction, such as the entering of a purchase invoice, to the final VAT submission.
HMRC make clear that the manual typing of figures or totals together with any copy and paste of data is not acceptable under digital rules.
5. What are the common examples of a digital link?
A digital link can be defined in a number of ways, such as:
- Linking cells between spreadsheets: data can be transferred between spreadsheets using formulas or macros to link cells.
- Importing and exporting of data: the output of transaction data from source digital data records into a format such as CSV. This is then imported into the VAT calculation spreadsheet or software to form a digital link.
- Automatic data transfer: data is transferred between systems, which in practice means data is taken directly from an accounting system or third-party application directly to MTD compliant software.
- Email or portable device: spreadsheets containing digital records can be sent via email or transferred to a portable device (such as a USB memory stick) to a recipient (such as an advisor) for import into MTD compliant software.
There are of course situations where manual adjustments may be required, such as VAT partial exemption adjustments. These can be calculated manually within the VAT workings and adjusted within the software once the final adjustment has been agreed.
6. What are the penalties if businesses fail to comply?
HMRC have introduced a penalty system from 1 April 2021 for those who fail to meet MTD obligations. Typically, this would apply to the first VAT return completed on or after this date.
If there is a multiple occurrence of failure to meet these obligations, a surcharge % may also be given following a points system for each incorrect event.
Possible fines and interest charges may also be applied if any errors occur in the VAT return.
How can we help?
If you are unsure that your processes are fully compliant or would like to discuss the new phase of MTDfV, please contact our Business Services Director James Gilliland (email@example.com), or your usual Lubbock Fine contact.