When HMRC implemented Making Tax Digital (MTD) for VAT three years ago they allowed a soft-landing period for businesses to become fully compliant with the requirements of MTD.
That soft landing period ended on 1st April 2022, and since then it has been a legal requirement for all VAT returns to be sent digitally and directly from software that provides a digital link for sales & purchases from the original point of entry to the submitted Return.
The overwhelming majority of businesses have addressed the first issue and now have digital accounting software to submit Returns to HMRC’s MTD VAT gateway.
However, HMRC’s wider objective with MTD was to reduce the VAT gap by mitigating the amount of tax lost to avoidable errors and making it easier for businesses to get their VAT calculations right. To that end businesses must have functional compatible software able to:
l record and preserve digital records
l provide HMRC information and returns from data held in those digital records, using the API platform
l receive information from HMRC, using the API platform
Once data has been entered into software that you use to keep and maintain your electronic account, any further transfer, recapture, or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software, to create the digital journey.
Manually transferring data within or between software programs, products, or applications (that make up functional compatible software) is not acceptable under Making Tax Digital. For example, you must not note down details from an invoice in a ledger, then use that handwritten information to manually update another part of the business functional compatible software system.
Each transaction must be recorded digitally at its tax point (either at invoice date or payment date depending on whether Returns are being submitted on the invoice or cash basis). Businesses deemed to be using a retail scheme are allowed to record their gross takings daily. Manual entry of takings figures weekly, monthly, or quarterly is not permitted.
HMRC’s new VAT penalty regime has been delayed until January 2023, but penalties may still be applied for businesses that are not submitting their VAT returns in an MTD compliant matter.