With Making Tax Digital for VAT (MTD) now upon us, the focus of many businesses and their agents is (understandably) on making sure that they can get their first VAT return across the line. However, it shouldn’t be forgotten that MTD also brings with it some potentially significant changes to record keeping requirements.

This article highlights some key points about the digital records that need to be kept under MTD.  More information can be found in Section 4 of VAT Notice 700/22, which is essential reading for all who have responsibility for or advise on keeping records for VAT purposes.

What records do businesses need to keep under MTD?

There are three main elements to the digital records you need to keep under MTD:

  • permanent data (i.e. business name, address, VAT registration number, details of any VAT accounting scheme used);
  • the VAT account (broadly similar to current requirements); and
  • transaction data.

You may already be keeping some of this detail digitally but other parts might require changes to your record keeping processes. The area where the biggest changes are likely to be required is transaction data.

Transaction data rules and relaxations

The VAT Notice sets out in detail what you have to record for each supply you make (i.e. sales) or receive (i.e. purchases).

For both sales and purchases you need to record the time of the supply (i.e. the tax point) and the value of the supply.  In addition:

  • for each sale you have to record the rate of VAT charged; and
  • for each purchase you have to record the total amount of input tax for which credit is allowable.

A key thing to note is that this information is required for each supply, not each invoice.  That means that, as a general rule, you can no longer just record invoice totals where there is more than one supply on an invoice.

There are, however, some relaxations to this general rule.

A key relaxation is that if there is more than one supply on an invoice you can record the invoice total as a single amount provided that the supplies are all in the same VAT period and charged at the same rate.

The VAT Notice contains a number of other specific relaxations around record keeping for MTD purposes, including:

  • Retail scheme users can simply record their Daily Gross Takings, and don’t have to keep a separate record of their individual sales.
  • Flat rate scheme users don’t need to keep a record of purchases unless they are capital expenditure goods on which input tax can be claimed.
  • For purchases (but not sales), totals can be recorded from supplier statements provided they contain the correct information.
  • Individual petty cash purchases with a VAT-inclusive value below £50 can be batched, subject to a total VAT-inclusive limit of £500 per entry.

The MTD legislation does provide for HMRC to introduce further relaxations to the record keeping rules where they agree that complying with them would be impossible, impractical or unduly onerous.  If you are aware of any areas where you feel a further relaxation may be needed the ATT would be interested in hearing from you.

Cash accounting and transaction data

The transaction data requirements may result in significant changes for those who use cash accounting for VAT, especially where they make or receive a payment which covers more than one invoice.

Under the pre-MTD rules, a cash accounting business would simply need to cross-reference amounts paid or received to invoices, and did not need to record each underlying invoice. However, under MTD, if businesses are not able to benefit from the relaxation for supplier statements (e.g. because they are recording a sale, or are not paying against a supplier statement), they must enter each individual supply or each individual invoice into the digital records.

This means that cash accounting businesses can no longer simply record the amount paid / received and the VAT therein with some form of cross-referencing. Instead, they now have to enter each individual supply or invoice within their digital records.

What about adjustments?

After initially recording a supply, you may need to adjust the input or output tax, for example to reflect a partial exemption calculation or capital goods scheme adjustment.

Adjustments do have to be recorded in your digital records. However, the good news is that only the total for each type of adjustment has to be included, not details of the calculations underlying them.  And you don’t have to go back in and amend the digital record for each supply – instead you just record the total adjustment.

What should businesses do now?

All businesses in scope of MTD should study the detailed record keeping requirements in VAT Notice 700/22 and consider where they might need to make changes to their current practices.

HMRC have acknowledged that businesses may encounter problems complying with their new obligations and have stated that they will take a proportionate light touch approach to record-keeping penalties.  This means that, provided you do your best to comply, HMRC will not pursue record-keeping penalties in the first year of mandation.

It is a good idea to start the process of making your records MTD compliant as soon as possible.  This will not only help to ensure that everything is as it should be before the light touch period ends, but could also be of assistance in demonstrating to HMRC that you made a genuine effort during that period.

The post MTD – don’t forget the records appeared first on Accountancy Age.