Making Tax Digital for VAT – MTD VAT

Making Tax Digital for VAT (also known as MTD) is the first step in HMRC’s strategy to move the UK taxation system into a modern digital age.

Initially there were plans for personal tax returns, as well as VAT returns, to be submitted under the new MTD digital system, however those plans have been postponed for now to allow time for the new digital VAT filing system to be fully implemented.

Further down the line we expect MTD to cover other areas of taxation, so keep your eye on HMRC updates to see what may affect you in the future.

This article explains Making Tax Digital for VAT with a particular focus on freelancers, contractors and modern service businesses, as that is our main specialism at JF Financial.

 

Making Tax Digital for VAT MTD VAT

 

What is Making Tax Digital for VAT?

MTD for VAT is the first step in a new digital tax return system being introduced by HMRC.

The main requirements are:

  • Key records must be kept digitally for VAT purposes
  • You will need to use specific software that is compatible with MTD
  • VAT returns will need to be submitted to HMRC through this software, rather than submitting VAT returns through HMRC online directly

 

What is the timetable for MTD?

The first mandatory date that MTD came into force was for VAT periods commencing 1 April 2019 onwards.

If you file quarterly VAT returns, the first VAT period that is covered by the new MTD rules is for the quarter ended 30 June 2019 (as that VAT quarter started on 1 April 2019).

To look at a different example – if your VAT quarter end is for the months ending February, May, August and November, then your first VAT quarter under the new MTD system will be the quarter ended 31 August 2019.

Some businesses will have voluntarily started MTD earlier than this if they chose to be a part of the HMRC pilot, however this was only a very small pool of people.

 

Who has to join MTD?

Not everyone has to submit their VAT returns through the new MTD system, some can continue to use the old VAT return system.

If you are VAT registered but your taxable turnover remains below the current VAT registration threshold of £85,000, you don’t have to join MTD – you can voluntarily join if you wish, but you don’t have to.

However, you have to continually monitor your taxable income on a rolling basis to determine if you have exceeded the threshold in any 12 months from 31 March 2019 onwards, if you exceed the threshold at some point you will need to then enrol into MTD.

MTD affects all business types – whether you are a limited company, sole trader or partnership you’ll still need to consider if MTD affects you and if it does, sign up.

 

What is taxable income?

When it comes to determining what income counts towards the taxable income threshold for MTD, you have to include all your supplies that have been made with a UK place of supply that are standard rated, reduced rated or zero rated for VAT.

You do not need to include supplies that are outside the scope of VAT or exempt from VAT.

Example:

Eric is a freelance consultant providing business consulting services to clients in both the UK and USA. The income received from UK clients is £60,000 per year and the income from USA clients is £40,000 per year.

Although his total income is £100,000, the USA income is actually classed as outside the scope of VAT, therefore is not included in the threshold test, this means his taxable income is £60,000 and below the £85,000 threshold, so Eric does not have to register his business for MTD, although he can do so voluntarily if he wishes.

He will need to continually monitor his income to make sure he doesn’t exceed the threshold in the future.

 

Exemptions to Making Tax Digital

There are some exemptions with regards to if and when you need to join MTD, which can be found on HMRC’s website below, these will not apply to most businesses:

Exemptions to MTD

 

How do you setup your business for MTD?

If you need to (or want to) register for MTD then there are two key steps you need to complete:

  1. You need to check if your current accounting software / system is compliant with MTD and if it isn’t you’ll need to find new software that is
  2. You need to register your business for MTD with HMRC

 

MTD compliant software

If your current accounting system is not compliant with MTD then you’ll need to find some software that allows your business to keep the required records digitally and also to submit your VAT return to HMRC through the accounting system.

This could be by using some modern accounting software or it could be by using something called ‘bridging software’ which will allow you to connect a non-compliant system (such as Excel) with HMRC.

HMRC have a link below which allows you to look for available software:

https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat

 

If you are a freelancer, contractor or run a small service business, we recommend you check out FreeAgent which is the software we specialise in at JF Financial.

 

How to register for MTD with HMRC

To register your business for MTD for VAT follow HMRC’s link below:

https://www.gov.uk/guidance/sign-up-for-making-tax-digital-for-vat

 

Once you have signed up you will receive a confirmation email from HMRC within 72 hours – you must not submit your VAT return until you get the confirmation email.

The VAT return filing and payment deadlines under MTD will remain exactly the same as the existing VAT filing system.

Once you get the confirmation email you will then need to activate MTD in your chosen accounting software and you can then file your MTD VAT return directly through your system.

Warning! Once you have signed up to MTD you will not be able to use the old VAT filing system.

 

What does digital record keeping actually mean?

HMRC have a detailed breakdown of what records must be kept digitally on the link below – but essentially if you choose to use compliant software then the system should be doing a lot of the digital record keeping work for you:

https://www.gov.uk/guidance/keep-digital-records-for-making-tax-digital-for-vat

 

Summary

This article is a brief introduction to the world of Making Tax Digital based on what is known at the date of publication (July 2019) – we would highly recommend you discuss your specific circumstances with your accountant.

You can read HMRC’s full guidance notes on the link below:

VAT Notice 700/22: Making Tax Digital for VAT