VAT Notice 700/22: Making Tax Digital for VAT

HMRC has published VAT Notice, 700/22: Making Tax Digital for VAT, which sets out who needs to follow the MTD rules, what records need to be kept, and what agents need to do.

This is a freeview 'At a glance' guide.

MTD for VAT commenced on 1 April 2019. The Notice provides the following information:

Who needs to follow the MTD for VAT rules?

• From 1 April 2019, if your taxable turnover is above the VAT registration threshold you are within MTD for VAT and must follow the VAT rules set out in the Notice. This includes anyone whose taxable turnover exceeds the threshold for the 12 months ending 31 March 2019.
• For VAT periods starting on or after 1 April 2022 all VAT registered businesses are within MTD for VAT whether their taxable turnover exceeds the threshold or not, i.e. where they have voluntarily registered.
• If you drop below the threshold having crossed it, you remain in the MTD for VAT regime, unless you Deregister or meet another exemption.
• Other exemptions, which you can choose not to apply:
  • Business is run entirely by practicing members of a religious society with incompatible beliefs.
  • It is not practical for you to use digital tools due to age, disability, remoteness of location, or any other reason.
  • You are subject to an insolvency procedure.
• MTD for VAT will apply for the first VAT period starting on or after 1 April 2019, or the first VAT period starting after the date you cross the VAT threshold or at the latest the first period starting on or after 1 April 2022.
• HMRC give the following examples

Example 1 - Existing business with taxable turnover above the VAT registration threshold on 1 April 2019

A business submits a quarterly return covering the period 1 March to 31 May 2019. The business taxable turnover exceeds the VAT registration threshold and therefore the business will need to comply with Making Tax Digital rules for the period starting 1 June 2019.

Example 2 - Business with a taxable turnover above the Making Tax Digital threshold at the point they need to register for VAT

A business that is not registered for VAT is required to register from September 2019 because the taxable turnover over the previous 12 months has exceeded the VAT registration threshold. The business must follow the rules in this notice for all VAT Returns they are subsequently required to make as their taxable turnover was above the VAT threshold when they were required to register.

Example 3 - VAT registered business with taxable turnover below Making Tax Digital threshold until November 2019

A business is registered for VAT but its taxable turnover is below the VAT registration threshold until November 2019. The business must follow the rules in this notice for any VAT period that starts on or after 1 December 2019 as its taxable turnover now exceeds the VAT registration threshold.

Digital record keeping

• Under MTD for VAT, some business records must be kept digitally, with functional compatible software.
• Some records are also required, by law, to be kept in original form to enable VAT recovery, such as C79 import certificates.
• Functional compatible software is a program that can:
  • Record and preserve digital records.
  • Provide HMRC information and returns from data held in those records by using the API platform.
  • Receive information from HMRC via the API platform.
• There must be 'Digital Links' between software programs or applications where more than one part of the software makes up the digital data submitted to HMRC:
  • You cannot enter data into a spreadsheet, then manually copy this into a different bit of software. There is no digital link.
  • HMRC accept that digital links do include:
    • Spreadsheets with linked cells
    • Emailing a spreadsheet containing digital records to an agent for importing into their software for calculation purposes
    • Transferring digital records onto portable devices
    • XML, CSV imports and exports, and downloads and uploads of files
    • Automated data transfer
    • API Transfer.
  • In other words there can be no manual involvement in re-entering data from one source to another.
  • ‘Cut and paste’ is not a digital link.
• Digital links are not required for the first year of mandation (April 2019 to March 2020 or 30 September 2020 for deferred businesses). In that period, ‘cut and paste’ (or more usually 'copy and paste') will be acceptable.
• This "soft landing" exempting digital links was extended by a year/six months, to 1 April 2021, due to the Coronavirus pandemic.
• From 1 April 2021, for all businesses within MVD, digital links must exist between bookkeeping software.
  • In October 2019 HMRC announced that any businesses needing to update particularly complicated or legacy IT systems could apply for an extension to the 2020 deadlines but that this would only be given in exceptional circumstances. Businesses needed to apply before the end of their soft landing period. 
• HMRC acknowledges that some manual calculation adjustments may be required. For example, partial exemption, VAT Flat rate and Capital Goods Scheme adjustments

The following data must be kept digitally:

• Designatory data:
  • Business name.
  • Principal place of business address.
  • VAT registration number.
  • Details of any VAT accounting schemes you use.
• Supplies made that are included in the VAT Return:
  • Time of supply.
  • Value of the supply.
  • Rate of VAT charged.
  • You do not have to record Mixed supplies subject to different rates that are included in a single price separately. You can record the total value and total VAT due.
  • Where a third-party agent makes a supply on your behalf, you do not have to keep digital records in respect of that supply until you have received the information from your Agent.
• Supplies received:
  • Time of supply
  • Value of supply
  • VAT you are claiming
  • Where claiming VAT on employee expenses reimbursed, this can be entered as one line per employee, with the total value and total VAT due. You do not have to record each purchase separately.
  • If you receive Reverse charge supplies, you will have to enter the purchase and the deemed self-supply separately if your software does not automatically deal with this.
• Adjustments and errors:
  • Where the amount of VAT changes as a result of an adjustment or error correction, you do not have to amend the digital record of the supply.
  • The VAT Notice includes the following examples:

Example 1

A partially exempt business software allows it to record amounts of VAT relating to both exempt and taxable supplies. At the end of the period they complete a partial exemption calculation and put the adjustment into their return. The calculation is not completed in the software. The business does not have to go back and change each line in the software to reflect the amount of recovery on each invoice.

Example 2

A business has a software package that requires a period to be closed before the return can be completed. After the period has been closed the business is calculating adjustments before submitting the return. Invoices are found that should be included on the return. The business can enter the figures as an adjustment to ensure the return is correct, but they must record the invoices in their functional compatible software to complete their digital records.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

Example 3

A business notices an error in its records. The total value of the error is £65,000 so the business must correct the error using error correction method 2. The business does not have to make any changes in its functional compatible software, but must keep all records as normal.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

• Schemes:
  • If operating the retail scheme, the Daily Gross Takings (CGT) must be recorded digitally. You do not have to keep a separate record of the supplies that make up the DGT.
  • If operating the Flat Rate Scheme (FRS), you do not need to keep a digital record of purchases which are not capital goods on which VAT can be claimed. You do not need to keep a digital record of the relevant goods used to determine if you are a Limited cost trader.
  • If you use the Gold Special Accounting Scheme, you must keep a digital record of the value of sales made under the scheme and total VAT on purchases under the scheme.
  • The additional records required to be kept for those using the Margin Scheme, do not need to be kept in digital form.
• Summary data that the functional compatible software must contain:
  • Total output VAT on sales
  • Total VAT due on EU acquisitions
  • Total VAT due under reverse charge
  • Total input VAT entitled to be reclaimed
  • Total input VAT claimed on EU acquisitions
  • Total VAT payable or reclaimable due to Error corrections
  • Any other adjustments. Each type of adjustment must be in a separate line.

Additional guidance May 2019:

• This explains certain relaxations in respect of supplier statements, petty cash and charity events:

Supplier statements:

• Where a supplier issues a statement for a period you may record the totals from the supplier statement (rather than the individual invoices) provided all supplies on the statement are to be included on the same return and the total VAT charged at each rate is shown.
• If you choose to do this, you must also cross reference all supplies on the supplier statement to invoices received, but this can be done outside of your digital records.
• This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

Petty cash:

• HMRC will accept that a number of petty cash transactions can be recorded as a single purchase in the digital records of the business, subject to a monetary limit.
• Where a business uses petty cash to pay for small value items, these do not need to be individually recorded in the digital records. The business can record the total value and the total input tax allowable where the individual purchase has a VAT-inclusive value below £50 and the total value of petty cash transactions recorded in this way does not exceed £500 including VAT per entry.

Agents

• You can authorise HMRC to receive data from and send data to an agent.
• Once authorised the agent can sign up your business to the MTD service and use software to create, view, edit, and send data to HMRC.
• Your agent can also be authorised to keep and maintain digital records on your behalf.
• You will not need to re-authorise agents already authorised to receive your VAT returns.
• You can have more than one agent performing different MTD functions.
• The agent will need to sign up to the Agent Services account.

Other information

• VAT updates will be made available for MTD at a future date. This will allow businesses to voluntarily provide additional VAT information to HMRC outside of the VAT Return.
• Supplementary data will be made available for MTD at a future date. HMRC will specify what this data must be in due course, but will broadly be information supporting the Box 9 figure declared on the VAT return (acquisitions from EU members states).
• The full Notice also contains a number of examples of where a ‘digital link’ is required.

Usegul guides on this topic

Making Tax Digital: VAT

MTD: toolkit for accountants

Making Tax Digital: index

External links

HMRC VAT Notice, 700/22: Making Tax Digital for VAT