Making Tax Digital (MTD) will be the biggest revolution for decades in a way the UK tax system is run. It is being introduced from 1 April next year, when all businesses with a turnover above the VAT threshold of £85,000 will be required to submit their VAT return data electronically. The VAT returns of these businesses will, from that date, need to be filed from “functional compatible software” that meets the requirements of MTD for VAT. Filling in the VAT return boxes online or on a paper form will become a thing of the past for almost all businesses.
What do you need to do?
HMRC has recently published details of the first 18 suppliers with “functional compatible software” that meet the requirements of MTD for VAT. Businesses affected should contact their accounting software provider to see if they are on this list. If they are, your software will need to be upgraded to enable you to file VAT returns from 1 April 2019. If you maintain your accounting records manually or on a spreadsheet, you will need to transfer your accounting records to a suitable accounting package before 1 April 2019 to enable you to comply with the new filing regime. If your software provider is not going to issue a version that will meet these requirements you need to urgently consider migration to a compatible accounting software package, or consider if “bridging software” is an option.
Preparation of your VAT returns
Do you currently prepare your VAT return by extracting the financial information from your accounting records, preparing adjustments for matters such as the partial exemption on a spreadsheet (or other working paper) and then prepare your VAT return? If yes, you will need to consider how the adjustments should be recorded in your accounting software so that the VAT return can be generated accurately (from 1 April 2019) by the software. Kingston Smith recommends a dry run for the first quarter of 2019. This way, you can address any issues before filing your first return under the MTD regime.
Does your finance team enter VAT transactions correctly in the accounting software? Any errors made on posting are going to be visible to HMRC. It is sensible to ensure that the data is entered correctly when a transaction is recorded. The top five errors our VAT team sees when reviewing returns are:
• Client entertainment
VAT cannot be recovered on invoices (restaurant bills, shooting days, trips to the races) where clients or prospective clients are guests.
• Staff subsistence
VAT can be recovered by taking your staff out for a meal to celebrate a job well done or for team motivation. This also applies to staff Christmas parties.
• Trade creditors
Occasionally a supplier’s invoice remains unpaid after six months – often as a result of a dispute about the delivery of the service or goods or the quality received. HMRC requires that any VAT reclaimed on invoices older than six months to be adjusted for in the next VAT return, and effectively repaid to HMRC. If the invoice is paid in the future, the VAT can be reclaimed in that quarter.
• Trade debtors
Similar rules apply for trade debtors (also called bad debt relief). If a customer has not paid after six months after the due date for payment, a business can recover the VAT paid to HMRC in the next VAT return. If the debt is paid subsequently, the business is required to declare the VAT received from the customer in the next VAT return.
• Processing invoices for supplies that are outside the scope, exempt or zero-rated for VAT
Care is required when processing all invoices where no VAT is charged. The right VAT code needs to be selected in the accounting software to ensure that the correct analysis is produced for the VAT return. A quick reminder may be in the order of the correct codes – the VAT classification should be obvious from the narrative on the supplier’s invoice.
If you require any further information or assistance in considering your options, please contact Mahmood Ramji Partner at Kingston Smith (Heathrow), or Heathrow Powell in the property team (details opposite).