Making Tax Digital for VAT
Written by Ray Coman
Making Tax Digital for VAT is a mandated program for VAT registered business to store records digitally and file VAT Returns via accounts software. The aim of HMRC through Making Tax Digital is to improve the efficiency and effectiveness of the UK tax system. The primary goal is to reduce errors and bring the UK to a leading position in its digitization of tax reporting.
The government announced in August 2020 that all VAT registered businesses will be required to report via Making Tax Digital from whichever is the first Return after 1st April 2022. Businesses below the VAT threshold can join voluntarily before April 2022. Quarterly reporting of income for sole traders and landlords is subject of a separate report.
For whichever was the first VAT period after 1 April 2019, it has been a requirement for VAT registered business with a turnover above the VAT threshold to register for Making Tax Digital. This means that:
- All accounting transactions have to be recorded in a digital format;
- The date, type and VAT on every transaction will be recorded;
- and VAT Returns are filed online using compliant software.
It is not necessary to store primary source records, such as paper receipts, electronically. HMRC have indicated that a scanned or soft copy receipt is sufficient as proof of a transaction. It is a requirement to keep accounting records for at least six years in case of any HMRC enquiry.
Many software services are integrated with banks, so that the software can poll the bank statement for updated information to be automatically entered into the financial records. Some services offer an auto-suggest function in which transactions with a certain description on the bank statement are assigned to the respective category in the profit and loss report.
Furthermore, it is possible to instruct the software as to the kind of supplier carrying a certain name, for instance that “Coman&Co” is an accountant. A smart software on recognising that brand or description in the bank statement will automatically assign the bank entry to the designated category on the profit report. It is possible to scan or photo a receipt for the information it contains to be digitised.
Coman &Co is a Xero certified and QuickBooks certified adviser. We are able to re-sell QuickBooks at wholesale prices and these prices can be viewed via our pricing page. An even more cost-effective solution is to use Excel with a bridging software. Our QuickBooks offer is currently cost effective and we consider that the additional benefits will help to improve efficiency for many of our clients.
Once the transaction is recorded in the compliant software. The benefit of using accounting software is that a transaction can be recorded for the purpose of the year end. An invoice is also reported for credit control purposes. With each bank reconciliation, overdue invoices can be identified and followed up on.
For business with a turnover below £1.35 million, it is possible to use cash accounting. This means that VAT received less VAT paid in each VAT period is the amount owed to HMRC. Provided the bank reconciles at the end of the VAT quarter, the VAT Return produced by the software should show the correct liability. The trader enters government gateway user ID and password credentials associated with the business tax account into the software. With a simple instruction, a VAT Return can be filed direct to HMRC. Cash accounting used through software can make VAT compliance a ‘no brainer.’
It is possible to apply for an exemption from Making Tax Digital on the basis that the business is insolvent. People who cannot use computers on religious grounds. An exception could be made for applicants who cannot use a computer due to age, disability or the location of their business.
Coman& Co is a certified adviser for both QuickBooks and Xero. We can resell QuickBooks at wholesale prices to clients who have engaged our services. It is possible to grant us accountant access through the software. Our certification is based on qualification and experience and therefore indicates our competency at using the accounting package. We offer a full bookkeeping and VAT Return submission service for clients who wish to outsource this. Alternatively, we offer a consultancy only option to assist with registering for VAT and getting set up with the software. We are available to answer tricky VAT queries, for instance on VAT exemption in certain industries and on cross border transactions.