Making Tax Digital (“MTD”) for VAT requires all VAT-registered businesses to keep records digitally and file their VAT Returns using the appropriate software (this can be either using an API or bridging software).

Timeline

Although the Making Tax Digital regulations originally came into effect on 1 April 2019, HMRC introduced a ‘soft-landing’ phase during which there has been a two-stage introduction of the MTD requirements.

For public authorities, stage one took effect from the VAT return for October 2019. This first delay to the initial implementation of MTD resulted from a ‘deferral’ period that HMRC provided for complex entities (which included public bodies) that postponed the MTD start date for six months.

Stage two took effect from the VAT return for April 2021, when HMRC’s 18-month ‘soft-landing’ phase ended. Except for those taxpayers who requested (and were granted) a temporary extension, all taxpayers with a taxable turnover above the compulsory registration threshold (£85,000) were due to fully comply with the MTD regulations from then.

From April 2022, all VAT-registered businesses must follow the MTD rules, regardless of their taxable turnover.

Therefore, not only will the regulations apply to your authority, but they will also apply to any VAT-registered wholly-owned companies.

What does this mean?

To be compliant, you will need to ensure that digital links between all financial data that make up the VAT return.

This means that once a transaction has been electronically input into functional compatible software[1] from a source document, there can be no manual steps getting that transaction to the VAT return (subject to a small number of exceptions).

Manual steps include the use of cut/copy and paste. However, data can be moved using digital links, including formula links on a spreadsheet such as Microsoft Excel.

For example, you will not be able to run a PDF report from one system and manually type the figure into another system or your VAT return. You will, however, be able to produce a spreadsheet report and either upload it electronically into another system or digitally link it to your VAT return working papers using a formula.

The essential factor is that you need to be able to trace the ‘digital journey’ that your VAT return figures have travelled from your nine boxes back to the reports you take from the financial system.

There is also data that HMRC expects you to hold digitally (data relating to your designatory data[2], supplies made, supplies received, and some summary data).

HMRC has published its guidance for MTD within the public notice 700/22 ‘Making Tax Digital for VAT’, where you can find further information. The latest update was on 1 April 2022.

What about when it goes wrong?

HMRC has not been too clear with MTD-specific penalties. A new penalty regime is coming in from 1 January 2023 (relating specifically to late filing and payment). However, the current penalty regime will apply until this point.

How PSTAX can help

PSTAX can carry out a full review of your authority’s VAT return processes to assess the level of its compliance with the MTD requirements. Please contact stephanie.leitch@pstax.co.uk for further information.

[1] HMRC define functional compatible software as a software program or set of software programs, a product or set of products, or an application or set of applications. It must be able to record and preserve digital records, provide HMRC information and returns from data held in those digital records, using the API platform and receive information from HMRC, using the API platform.

[2] Designatory data includes:

• your business name
• the address of your principal place of business
• your VAT registration number
• any VAT accounting schemes that you use