Avoid MTD non-compliance penalties

MTDfV extended

HMRC’s reason for introducing Making Tax Digital for VAT (MTDfV) was to improve the accuracy of VAT returns submitted by registered businesses. It was introduced in 2019 for businesses with annual taxable sales exceeding £85,000 but extended to voluntary registrations for periods beginning on 1 April 2022 or later. In other words, all registrations are now captured by the regulations.

Many voluntary registrations submit returns on a calendar quarter basis. So, your first filing deadline with the new regulations will be 7 August 2022. Make sure you have met all the requirements before this date.

HMRC factsheet

HMRC issued a factsheet on 31 May 2022 titled “Compliance checks: How to avoid penalties for Making Tax Digital for VAT”. A penalty of up to £400 may be issued for filing returns without using MTDfV-compliant software. You can check your software against HMRC’s approved list on GOV.UK - just search for “Making Tax Digital for VAT software”.

What records must you keep?

HMRC refers to your compliant software as your “electronic account”. This must not only include details of your business name, address and VAT registration number but also a digital record all of your sales and purchase invoices or - if you are a retailer - a record of your daily gross takings.

For sales, you must record the VAT-exclusive figure of each invoice and also the rate of VAT you are charging. With your purchase invoices, you must record both the purchase value excluding VAT and the input tax you are claiming on each invoice. You must also record the time of the supply for both your sales and purchase invoices, which is usually the invoice date.

If you are a retailer, you only need to digitally record the daily gross takings figure and not every individual sale. There are other accounting transactions that you must record digitally, for e.g. adjustments you make to a return; reverse charge transactions etc.

Spreadsheets

You can still use spreadsheets but must ensure there is a digital link between your spreadsheet totals and the electronic submission of the return to HMRC. This usually means that you will need to buy bridging software.

A digital link is also needed if you have more than one software program in operation, e.g. if you are a group registration and each company has its own accounting system. Copying and pasting data is not a digital link and is not acceptable to HMRC.

The factsheet says that you could receive a penalty of between £5 and £15 for every day where you do not meet these requirements.