VAT-registered businesses are mandated to maintain digital records for VAT purposes and submit their VAT return information to HMRC through Making Tax Digital (MTD) functional compatible software. Exceptions to MTD for VAT (MTDfV) compliance are limited, primarily exempting businesses already excused from online VAT return filing or those formally insolvent.
In the rare instances where businesses believe they qualify for exemption, we encourage contacting us for further evaluation. Automatic exemptions are extended to businesses already exempt from online VAT return filing or in a state of formal insolvency.
HMRC retains discretionary powers to grant exemptions in specific circumstances, such as when businesses assert an inability to utilize computer technology, software, or the internet due to reasons like disability, location, or religious beliefs. Businesses have the right to appeal HMRC’s refusal of exemption.
For businesses within the scope of MTDfV, adherence to regulations mandates the submission of VAT returns using software compliant with MTDfV. Information sourced from digital records is utilized to populate the VAT return. Importantly, the statutory VAT return deadlines and payment dates remain unaffected by the changes introduced under the MTDfV project. Businesses opting for monthly or annual VAT return submissions can continue their current practices.
HMRC does not supply MTDfV software, and manual record-keeping is deemed unacceptable. Specified records must be maintained in 'functional compatible software,’ capable of VAT return calculation and submission to HMRC through an Application Programme Interface (API). While various methods of achieving this are acknowledged by HMRC, the transfer of data to HMRC, from digital records to return filing, must be exclusively digital. Detailed requirements are outlined in VAT Notice 700/22: Making Tax Digital for VAT.
Functional compatible software, as defined in the VAT notice, refers to a software program or a set of compatible programs capable of connecting to HMRC systems via an API. Its functionalities include maintaining digital records as per MTDfV rules, preserving digital records for up to six years, generating a VAT return from digital records, submitting data to HMRC digitally, voluntary provision of VAT data to HMRC, and receiving information from HMRC via the API platform.
VAT Notice specifies records to be kept digitally, encompassing 'designatory data,’ the VAT account linking primary records and VAT return, along with information about supplies made and received, including applicable VAT rates. For supplies received, the amount of input tax to be claimed is also a requisite.
Contrary to misconceptions, MTD does not enforce a completely paper-free environment, nor does it mandate the use of digital invoices and receipts. However, the recording of supplies made and received must be in digital format. In cases where invoices and receipts are not digitally stored, traditional hard copy methods may be employed for VAT purposes.
Addressing software issues, digital records required for MTD are not confined to a singular location or program. Businesses are permitted to maintain digital records in various compatible formats, with the use of spreadsheets allowed, provided they are complemented by MTD add-on software.
Effective from April 1, 2021, if digital records are dispersed across multiple programs or supplemented by add-on programs, it is imperative that all programs are digitally linked. The specifics of these digital links are outlined in VAT Notice 700/22.