Most VAT registered small businesses who trade above the VAT threshold (currently £85,000 per annum) will be required to comply with MTD from the start of the first VAT period commencing on or after 1 April 2019. From the joining date, those affected businesses will be required to:
- keep financial records in a digital format (spreadsheets are acceptable); and
- submit VAT returns to HMRC using "functional compatible software".
A very small percentage of organisations with more complex VAT affairs will not be required to join until the first VAT period beginning on or after 1 October. Some - a very small number - may be exempted altogether for religious or other practical reasons.
Small businesses who are VAT registered but trade below the VAT threshold do not have to sign up to MTD, but may do so voluntarily.
Those businesses trading under the VAT threshold who choose not to sign up to MTD voluntarily must, however, monitor their taxable sales on a rolling 12 month basis from 1 April 19 and if the threshold is breached at any time they must join MTD from the start of the next VAT period. Exempt and 'outside scope' income is excluded from the calculation.
Once a business has joined MTD, it may not leave again (even if turnover falls below the registration threshold) unless and until the business deregisters for VAT.
Retailers are not required to digitally record every single sale at the point of sale, but should record the daily gross takings (eg from till Z totals) in a digital format. Businesses that raise sales invoices need not raise each individual invoice in a digital format, but each invoice should be digitally recorded.
Purchase invoices should be recorded digitally although Flat Rate Scheme users only have to digitally record purchase invoices where input VAT is being claimed i.e. on qualifying capital expenditure.
Further guidance on digital record keeping is provided in HMRC's VAT Notice 700/ 22: Making Tax Digital for VAT.
HMRC has promised a "soft landing" so that no penalties will be issued until after April 2020 if a business does not have digital links in place between different parts of their accounting system.
We have been in contact with all affected clients for some months now and one of the biggest misconceptions seems to be that small businesses running a Sage accounts package do not need to take any action at all with respect to MTD for VAT. This is not necessarily true - it is our understanding that those Sage users who are on a monthly subscription should be able to comply, but others may find that the software is not MTD compatible without switching to a monthly subscription, or purchasing a standalone MTD module.
Small business owners who are in any doubt about how the MTD for VAT rules apply to them, or whether they are adequately prepared to comply with the new requirements, should seek professional advice without delay.
Contact us with your questions.