Most of us know that when we eventually come out of this awful pandemic, life will have transformed. The way we work, how we shop and how we socialise will have changed but change was always happening and will continue to happen.
One major change that continues to happen in our industry is MTD. Last summer the Treasury set out a first draft of the government’s ten-year plan to modernise the administration of our tax system. This very much includes the MTD programme for Income Tax and Corporation Tax and it is significantly going to change the way we report figures to HMRC and how we record them. It is perhaps the biggest change in reporting since the introduction of Self-Assessment in 1996.
HMRC will require businesses (including landlords) to keep digital records of all their business income and expenses and report on a quarterly basis using functional compatible software.
HMRC will bring small businesses who are VAT Registered with turnover below the VAT threshold onto the Making Tax Digital for VAT scheme from April 2022. This means that now is the perfect time to start understanding the rules, find software, and establish processes.
For businesses with turnover above the VAT threshold who are already complying with MTD when it comes to submissions of VAT Returns, now is a great time to review Making Tax Digital systems and processes as the soft-landing period comes to an end on 31 March 2021. After this date you must be keeping digital records.
From April 2023 MTD will apply to the self-employed and landlords so again let us start looking at your systems and making sure you will be ready in good time.
What is digital record keeping?
Simply put the term “digital records” refers to the actual information a business must store, it is the “digital link” which later transfers that data.
HMRC says “once data has been entered into a software used to keep and maintain digital records, any further transfer, recapture or modification must be done using digital links.”
It for example if you are still using a handwritten invoice and you then enter this into accounting software such as QuickBooks, that is acceptable. However, if you are using Excel or any other software to record your sales, then data has already been entered into a software and therefore any further transfer to your bookkeeping system (or the system that makes the onward submission to HMRC) must not be done manually. There needs to be a digital link.
The use of “cut and paste” or “copy and paste” does not constitute a digital link. Using a ledger to record the sales such as cash sales and then transferring summaries to your system will also not be acceptable.
If you are using MS Word for your sales invoice templates it may be okay. We say okay because whilst HMRC has not ruled out keeping Word invoices, they have said that this goes against the “spirit” of MTD when the same function can be done via the compatible software used to make submissions. We are therefore encouraging those of you who are using Word templates to think about changing.
The requirement to keep digital records does not mean that businesses will have to scan and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer but each individual transaction (not summaries) will need to be recorded and stored digitally with some exceptions such as those in retail.
If you are operating in cash sales including retail schemes you must keep a digital record of your Daily Gross Takings (DGT) but are not expected to keep a breakdown of these daily figures in your functional compatible software. So, retailers are not expected to capture each individual supply, but they are expected to record a daily taking. The input of the DGT is the start of your digital journey.
This can be very time consuming and prone to errors and that is why we believe that adopting technology will help you here. HMRC would like to encourage records to be kept in as near to real time as possible, but it will still be possible to create the digital records at quarterly intervals, using a bookkeeper or accountant if required, provided the information is entered into a digital record keeping system at that stage.
We believe that keeping records in real time will give you many advantages and opportunities that your business will not have had so far. We will explore these further in the blogs during the coming weeks and months.
What is included under digital records?
There are two main elements to digital record keeping under MTD:
- Permanent data (i.e. business name, address, VAT number, details of any schemes used)
- Transaction data and this is the area where change may be required.
The regulations require the following records to be kept digitally:
- The name of the business or organisation.
- The address of the principal place of business.
- The VAT registration number.
- Details of any VAT accounting schemes used.
So, this information will be recorded on the software (functional compatible software) used to submit your returns to HMRC each quarter.
For supplies made:
- The time of supply i.e., tax point date
- The value of the supply i.e. net value excluding VAT
- The rate of VAT charged.
- If multiple supplies subject to the same rate of VAT are made at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.
- If an invoice has supplies at different rates of VAT (eg, adult’s and children’s shoes) there must be a separate digital record for each rate of VAT charged. You must split the total value of supplies on the invoice and make a separate entry in the digital records for each rate of VAT charged. This is needed to meet the requirement to have a record of outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.
Example 1:You sold 10 standard rated items and 15 zero rated items on a single invoice then you would only need to record the total figures for each of the VAT rates.
Example 2: Landlord uses a letting agent to rent out a number of properties. Each month the letting agent provides a summary of the rents collected and VAT charged. The business can treat all supplies covered in this summary document as if they were covered by a single sales invoice, rather than treating each invoice issued on their behalf separately.
For supplies received:
- The time of supply i.e. tax point
- The value of the supply including any VAT that is not claimable by the business.
- The amount of input tax to be claimed.
- If there is more than one supply on an invoice the business can record the totals from the invoice. There is no requirement to record inputs split by VAT rate.
All VAT registered businesses must keep and preserve certain records. If you decide to receive an invoice in a paper format and type the data contained in the invoice into a compatible software, you will still need to keep the invoice in its original form. However, if your invoices are scanned into your software using an App such a Receipt Bank so long as the image contains all the details you will no longer need to keep the paper version.
Where a business uses petty cash to buy small items such as pint of milk, these do not have to be individually recorded in the digital records. Any petty cash items costing less than £50 can be grouped together but the total cannot exceed £500 per entry. These are VAT inclusive amounts.
What is meant by functional compatible software?
Your record keeping must be done in a software that is a functional compatible software, so it “speaks” to the HMRC portal i.e. it must always be through an API (Application Programming Interface) which is when two applications talk to each other.
The cloud accounting software products such as QuickBooks and Xero are API enabled. Bridging software is a digital tool incorporating relevant MTD API’s and there are also API enabled spreadsheets which are available.
There is a lot to digest here but we hope it gives you some clarity over what is expected from you to comply with MTD. MTD provides an ideal opportunity to bring efficiencies to your internal processes and improve your financial data. A move to the cloud could be answer.