Making Tax Digital for VAT

From 1st of April 2019 HMRC’s VAT Notice 700/22 will come into effect; Making Tax Digital (MTD) for Value Added Tax (VAT).  The MTD initiative is believed to benefit HMRC on two levels.

It will help to ensure the correct VAT is being paid to HMRC, & seeing that VAT accounts for the highest unpaid tax in the UK (35%), the government has estimated that it will generate £610M in 2020-21 from eliminating erroneous returns.

The MTD initiative will also save HMRC money as it will no longer have the cost associated with maintaining the VAT portal where submissions are currently made, estimating a saving of £10M a year of taxpayers’ money.

HMRC’s long-term vision is to have one of the most digitally advanced tax administration systems in the world & they hope that by 2020 they will have MTD applied to all of UK’s taxation processes.

For this vision to be fulfilled it is believed that they will then strive to have all taxation data recorded in the Standard Audit File for Tax (SAF-T) format.  Once this is achieved, HMRC will be able to undertake tax & VAT investigations frequently & randomly with very little cost, as it will free up resources from having to obtain & enter the data for analysis.

Being VAT registered means that your annual income equals or exceeds the current threshold value of £85,000.00.  Currently, any business or individual registered for VAT, whether on a Flat Rate Scheme or on the Standard Rate, will from April 2019 need to prepare for the changes outlined by Notice 700/22.

When will it be applicable to me?

The 1st quarter of your VAT return that starts on, or after 1st April 2019.

Am I exempt from MTD?

Groups or individuals exempt from MTD include;

  • those with religious beliefs that prevent them from using technology
  • those going into insolvency
  • those that it is reasonably impractical to do so (eg. geolocation, physical &/or mental disabilities – that prevent the use of technology)

What are my responsibilities?

You will need to ensure that all your transactions (expenses & sales) are individually recorded digitally with a MTD-compliant software.  You still need physical &/or electronic copies of these records stored for at least 6 years.  The MTD-compliant software is then used to calculate & submit your VAT returns.

What should my ‘digital’ data look like?

From April 2019 all digital record keeping will include;

  • Business Name
  • Business Address
  • VAT Registration Number
  • VAT Account Schemes
  • Information about Supplies & Sales

All Supplies & Sales invoices should include;

  • a Tax Point Date
  • Sequential (alpha-)numerical labelling format
  • Itemisation of services/goods
  • NET amount clearly shown
  • VAT rate & VAT amount clearly stated

Currently, the date, NET & VAT amount all need to be digitally stored for each-and-every-one of your transactions.  It is also recommended that a digital upload of your bank feed is included to back the entries for both expenses & sales.  VAT will then be calculated using these digital entries & submitted to HMRC via the compliant software used to record them.

View our latest MTDfVAT Newsletter HERE

VAT Accounting Schemes

Using Standard VAT Accounting, we must complete four VAT returns each year. Any VAT due is payable quarterly, and any VAT refunds due are also repayable quarterly.
In contrast to standard VAT accounting, there are several alternative ways we can account for VAT that could save us time and money. Each of the schemes has advantages and disadvantages.

Among these schemes we can mention the following:

Annual accounting for VAT

Using this method, VAT is paid on account throughout the year in nine monthly or three quarterly instalments. These instalments are based on the VAT paid in the previous year. If the business has been trading for less than a year, the instalments are based on an estimate of the VAT liability.

Advantages:

•we only have to send a VAT return once a year

•reduces the amount of time spent in sorting out paperwork

• improves the cash flow of the business

Disadvantages:

•this method is not suitable for businesses that regularly reclaim VAT as they would only get one repayment at the end of the year.

• if the turnover of the business decreases, the payments may be higher than under the standard VAT accounting.

Cash accounting for VAT

When using the standard VAT accounting, the VAT is payable when an invoice is issued.
Advantage:
•If we use the cash accounting scheme, we do not need to pay VAT until the customer has paid us.

• it is a beneficial method because it improves the cash flow

• we do not need to pay the VAT if the client never pays us.

Disadvantage:

•we cannot reclaim VAT on purchases until we have paid for them.

The flat rate VAT scheme

The flat rate VAT scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT.

Advantage:

• we do not have to calculate the VAT on each and every transaction but just pay a flat rate percentage of the turnover as VAT

Disadvantage:

• one minus using this scheme is that we cannot reclaim VAT on our purchases, especially if we buy a lot of goods and services.

VAT schemes for retailers

Retailers, especially those who sell a high volume of low value goods to the general public, can find it very time consuming and costly to issue VAT invoices for every sale. The VAT retail schemes enable retailers to aggregate their sales and account for VAT on the total.

The main retail schemes are: apportionment schemes, direct calculation schemes and the point of sale scheme.

Margin schemes for second-hand goods, art, antiques, collectibles

The VAT we can recover when buying and selling second-hand goods is quite limited.

Advantage:

•This scheme comes in handy because it calculates the VAT on the difference between the purchase price and the sale price , that is the margin.

•Disadvantage:

•we need to keep very detailed records, otherwise we will be liable for VAT on the full selling price.

Tour operators’ margin scheme

Tour operators often buy goods and services from businesses in foreign countries, and cannot often reclaim their input tax. The Tour Operators’ Margin Scheme solves this problem by allowing tour operators to calculate the VAT on just the value that they add.

As every method comes with pros and cons, it is better to seek guidance from tax accountants like Taxfile in South London and Exeter to analyse your circumstances and tell you which VAT scheme suits you best.