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Legal update: Making Tax Digital (MTD) for VAT - Are you ready?

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12 March 2019

From 1 April 2019, HMRC will require the vast majority of businesses, including law firms, to comply with new MTD rules.

What does this mean for you?

1. Firms will need to keep electronic records of all VAT invoices and receipts

This does not mean that you will need to scan and store invoices and receipts digitally – you can continue to keep documents in paper form if you prefer, but each individual transaction will need to be recorded and stored digitally. Also, the following information will need to be kept digitally:

  • The date and value of each invoice raised; 
  • The rate of VAT charged; 
  • The date and value of each purchase invoice received;
  • The amount of Input VAT being claimed on each purchase invoice; 
  • A summary of the amount of Output VAT charged in a VAT quarter, including any VAT owed on acquisitions from other EU member states, or any tax paid under a reverse charge procedure; 
  • A summary of the amount of Input VAT being recovered in a VAT quarter, including any Input VAT on acquisition from other EU member states; 
  • Any amounts payable or recoverable following a correction or error adjustment; 
  • Any other necessary VAT adjustment. 

The list does not include records of fuel scale charge calculations, partial exemption calculations or capital goods scheme adjustments, and therefore a journal entry can be made for these.

Firms can continue to use the cash basis for VAT if applicable, although they will need to ensure that separate digital records of individual supplies made and received are kept, as creating records from bank statements and supplier statements will not satisfy the requirement.

All of the above will need to be kept for six years.

Nowadays, very few firms use manual ledger cards, so this requirement should not be a problem for the majority . That said, firms that use Excel-based accounting records will need to ensure that the information listed above is recorded.

2. VAT returns will need to be submitted using MTD-compatible software

The list of MTD-compliant accounting systems can be found at www.tax.service.gov.uk/making-tax-digital-software.

The list is gradually getting longer, but several of the mainstream legal software providers are not currently listed.

Many of our clients have been informed by their software providers that they will need to upgrade their software before they can submit VAT returns under MTD. Some providers are charging a fee for this; others are not.

Where software is not MTD-compatible, or for those firms that have Excel-based records, there are a couple of options:

  • Firms can purchase spreadsheet bridging software, to take the figures from the Excel reports and send them to HMRC. Most of these are fairly inexpensive; or 
  • Firms can send us their Excel reports and VAT figures every quarter, and we will send the figures to HMRC on their behalf, using our own bridging software. A few different bridging software providers have emerged in recent months, and our IT department is currently trialling several of them , to see which we prefer. Once we have made a decision, we should be able to submit VAT returns for our clients for a nominal fee.

3. What are the key dates?

All businesses required to comply with MTD will need to do so for their first FULL VAT period starting on or after 1 April 2019. A ‘VAT period’ is the inclusive dates covered by a VAT Return.

First mandatory MTD for VAT return periodDigital accounting records must be kept from Deadline for filing first mandatory MTD for VAT 
1 April 2019 - 30 June 20191 April 2019 7 August 2019
1 May 2019 - 31 July 20191 May 2019 7 September 2019
1 June 2019 - 31 August 20191 June 2019 7 October 2019  

If your software is MTD compliant we would recommend installing the update from your software provider AFTER you have completed your final VAT return under the old system.

4. Is there anything else you need to know?

It was originally intended that HMRC would also have access to the supporting figures behind a VAT return filed through MTD, allowing them to interrogate the figures more closely. However, this is unlikely to come into effect until 2020 at the earliest.

HMRC have confirmed that there will be a 12 month ‘soft-landing’ approach for digital links between Excel spreadsheets and other software. Once this 12 month ‘soft-landing’ has passed your software (or various pieces of software) must be able to:

1) Keep records in digital (electronic) form;

2) Preserve these digital records in a digital form;

3) Create a VAT return from these digital records, where every step in the process involved in producing the return is digitally linked to the previous step, and the return itself is submitted digitally direct to HMRC;

4) Receive information from HMRC regarding business compliance with MTD regulations and obligations via the Application Programming Interface (API).

If you have been using the basic bridging software up to that point you will need to review whether this will meet your ongoing obligations under MTD , as this will only continue to be a permissible option if the transfer of information between the accounting software package and the Excel spreadsheet can be effected digitally.

If you need help or advice on the best option for your firm, or assistance with meeting your obligations under MTD, please do get in touch.