Making Tax Digital for VAT

Introduction/enrolment

MTD takes effect for all VAT returns beginning on or after 1 April 2019. This means all VAT returns must be filed electronically using compliant software and not just by entering figures through the HMRC portal as might currently be the case.

You will receive a letter from HMRC by the end of February 2019 regarding signing up for MTD.

Unless you wish to join the MTD pilot scheme, it is essential that you don’t sign up until your last VAT return has been filed for periods beginning before 1 April 2019 otherwise you will not be able to file through old portal but will have to file under the MTD system. Sign up as soon as possible after your last pre-1 April VAT return filed to ensure you are enrolled in time otherwise you will not automatically be transferred onto MTD.

Compliant software

You will need to keep your VAT records on MTD compliant software. Most of the main software suppliers are producing compliant products and these will almost inevitably be on the basis of a monthly subscription rather than a one-off cost.

Our staff has experience of using Sage products and if required can help you through the transition. Our knowledge of other products is limited and the assistance we can offer will accordingly be limited. Sage support staff will be able to download the product to your computer and convert your existing data from earlier versions of Sage.

 www.Sage.com/uk/mtd  phone 0800 336633.

We recommend that clients who have an existing Sage program use Sage 50cloud version 25. There is also a web-based program which will be fine for new users who have a good internet connection as the program and data storage is based on the Internet, otherwise 50cloud would be preferable.

Record keeping requirements

Record keeping must meet the very detailed HMRC requirements and the main points are explained below:

  • For all items the date of supply, value and rate of VAT must be recorded. If you account on an invoice basis this will be the invoice date. If on a cash basis it is the date of receipt or payment.
  • If a sales invoice includes mixed VAT rate supplies e.g. some standard and some zero rated, each supply must be recorded separately.
  • If a purchase invoice includes mixed VAT rate supplies it isn’t necessary to record them separately so long as the total net and VAT amounts are correctly recorded.
  • For businesses using the VAT cash basis the recording of purchases will now be more detailed. Where if, before, several invoices on a statement are paid at once you may have posted just the statement total split between net and VAT. You must now record each invoice included on that statement separately, although not each item on each invoice.
  • For retailers that may have posted takings on a weekly or monthly basis these must now be recorded for each day. i.e. each day’s takings recorded separately and not grouped together.
  • Items on credit card statements cannot be grouped together and must be recorded individually.
  • Employee expenses claims – items may still be grouped together.
  • You need to make any private proportion adjustments and include where relevant any fuel scale charge on each VAT return.

Value Added Tax codes

It is important to use the correct tax analysis codes, these being:

  • Standard rated for VAT at 20% - majority of supplies and purchases unless falling into categories below.
  • Zero rated for VAT at 0% - e.g. crop sales, most water rates, seed purchases.
  • Reduced rate 5% - e.g. heating oil, gas and electricity either domestic or under certain quantities and some building work.
  • Exempt for e.g. rents (other than storage rents which are standard rated), insurance.
  • Outside the scope for items outside the scope of VAT – e.g. wages, drawings, tax payments, grants, Council tax and rates.

If you are using a Sage package the relevant tax codes are as follows:

T0 – zero rated

T1 – standard rated

T2 - exempt

T3 - standard/reduced rate relating to purchases for items used to make exempt supplies (e.g. expenses relating to rented properties)

T4 – non- attributable input VAT for partially exempt businesses (see below)

T5 - reduced rate

T9 – outside the scope

Partial Exemption

Partial exemption calculations can still be performed on a spreadsheet and the adjustments must be recorded on the VAT return.

To assist partial exemption calculations you need to use a separate ‘partial exemption code’ for purchases that relate to items that are used to make exempt supplies e.g. repairs to a let building and is VAT exempt  and a ‘non attributable code’ for purchases that relate to expenses that cannot be allocated directly to the making of taxable or exempt supplies ie telephone and office costs, fuel etc.

Penalties

There will apparently be a ‘soft landing’ approach to penalties for the first year but late payment surcharges will remain as before. HMRC has the power to charge penalties for failure to keep records which comply with the legislation.

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