Making Tax Digital: reporting VAT

Making Tax Digital: reporting VAT

With everything that is currently going on in the world, it can be easy to lose sight of changes that have been announced previously. And so, in line with the Government’s previous announcements, Making Tax Digital (“MTD”) becomes compulsory from April 2022 for the filing of all VAT returns.

So what, in essence, does this mean? Broadly, all VAT reporting must now be done digitally via MTD compatible software and records must be kept digitally. You can apply for an exemption but the circumstances under which an exemption will be granted are very limited. The detail on MTD can be found in VAT Notice 700/22, with some of the key points being highlighted by Martin Gurney below.

Penalties

The new regime includes new penalty provisions which include: a penalty of up to £400 for filing a VAT return other than electronically under MTD without the prior agreement of HMRC; a penalty of up to £500 for failing to keep the necessary VAT records; a penalty for failure to comply with certain regulatory requirements based on a daily rate of £5-£15 for a maximum of 100 days; a points based penalty system for late submission which then triggers a £200 penalty; a late payment penalty ranging from 0% - 4% plus interest currently at 2.6%.

Functional compatible software

Software has to be used which must be able to: record and preserve digital records; provide HMRC information and returns from data held in those digital records, using the API platform; and receive information from HMRC, using the API platform. In addition, data transfer or exchange within and between software products must be digital where the information continues to form part of your electronic account, and manually transferring data within or between software products is not acceptable under MTD. There are only a limited set of circumstances when manual inputs into software are allowed, most notably for Partial Exemption and Capital Goods Scheme adjustments.

Find compatible software here.

Old vs New

So what is the difference between the ‘old’ VAT system and MTD? From a VAT calculation perspective, there is no difference – MTD will not affect the calculation of VAT. The significant difference is in what is submitted to HMRC. The old system required the completion of nine boxes on the VAT return, as does MTD, but under MTD all of the data that comprises those nine figures is also submitted to HMRC. HMRC has been investing in software and, in particular, in its data mining capabilities. What we therefore expect to see is an increase in HMRC activity as a result of automated data mining which will highlight unusual or unexpected transactions.

HMRC has suggested that MTD will improve the accuracy of returns and therefore the collection of VAT. Those amongst us who are typically sceptical about the true objectives of such measures might suggest it also provides HMRC with a mechanism to introduce quarterly income tax and corporation tax payments across all entities, and also a mechanism to more closely monitor any differential between the quarterly data (VAT return data) and the annual data (i.e. the accounts). We will have to wait and see!

Regardless, MTD is here and failure to comply carries significant financial consequences.

How can Haines Watts help?

We advise clients with a broad range of tax related matters across a number of sectors throughout Swindon and the South West.

If you would like to have a conversation to see if our advice about getting organised ahead of time for MTD or for any other tax advice, please get in touch with your usual Haines Watts contact.