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Making Tax Digital for VAT requires VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT Returns using software.

It is increasingly common for business records and accounts to be kept digitally, in a software program on a computer or tablet, or in a smartphone application, or maintained through such a device and stored using a cloud-based application.

The difference under Making Tax Digital is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT Returns using the information maintained in those digital records and communicating with HMRC digitally through our Application Programming Interface (API) platform.

If your digital records are up to date, software will be able to collate and prepare your return for you. It will then show the return to you and ask you to declare that it is correct and confirm that you want to submit it to HMRC. Once you have submitted your return you will receive confirmation through your software that it has been received.

This notice provides further details of the Making Tax Digital rules.

In the wake of the recent changes to the reporting of VAT to HMRC, there has been a wave of product launches to form a bridge between Microsoft Excel or other spreadsheet-based systems, and HMRC. For all businesses over the VAT threshold, their VAT return for the first quarter after April 1st 2019 MUST be made using compliant software. It will not be possible to enter details into the online VAT return form in your HMRC account. For larger enterprises, this probably means expenditure on updates for the accounting package they use, but for small business, there are several (initially) free “bridging” packages available which will allow the existing process to be used with minor additions, and reporting to HMRC will then comply with current regulations.

From HMRC's own research, it appears that around 19% of small businesses who should be MTD compliant have not heard of MTD at all.  A further 25% are aware, have purchased software, but are yet to implement it.

A quick search of the HMRC website will give a long list of compliant software – there are 155 pieces of bridging software available at varying levels of complexity and price point. There are many free offers available, but most are free for the first year only.

Penalty for non-compliance

HMRC currently has the power to charge a penalty of up to £400 for filing a VAT return other than electronically without the prior agreement of HMRC (VAT regulations 1995 reg. 25A). This power has been rarely used but will be extended to the obligation to file VAT returns using functional compatible software. HMRC is expected to operate a soft landing where the trader has made reasonable efforts to comply.

In the 2019 Spring Statement, shortly before the start of MTD for VAT, the Chancellor confirmed that HMRC would take a “light touch” approach to late filing and record-keeping mistakes and that “where businesses are doing their best to comply, no filing or record-keeping penalties will be issued”.

HMRC’s online VAT return remains available only to businesses that are not within the scope of MTD for VAT, which includes businesses that complete a VAT return but have taxable turnover below the VAT threshold.



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