The Government has published guidance on forthcoming changes to digital record-keeping and VAT return requirements.
The new rules will apply from April 2019. Under Making Tax Digital (MTD), all VAT-registered businesses with taxable turnover above the VAT registration threshold will have to keep VAT records in digital form and file their VAT returns using compatible software.
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The software that businesses use must be capable of keeping records, preparing VAT returns and communicating with HMRC digitally via its Application Programming Interface (API) platform.
The HMRC guidance says: "If your digital records are up to date, software will be able to collate and prepare your return for you. It will then show the return to you and ask you to declare that it is correct and confirm that you want to submit it to HMRC. Once you have submitted your return you will receive confirmation through your software that it has been received."
Only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital. If the taxable turnover of a business subsequently falls below the threshold it will need to continue to follow the Making Tax Digital rules, unless it deregisters from VAT or meets other exemption criteria.
All VAT-registered businesses must keep and preserve certain records and accounts. Under Making Tax Digital, some of these records must be kept digitally within "functional compatible software". However, there are still some records that by law must be preserved in their original form for VAT or other tax purposes- such as a C79 import VAT certificate.
HMRC says that functional compatible software is a software program or programs, products or applications, that must be able to:
- Record and preserve digital records;
- Give HMRC information and returns from data held in those digital records using the API platform;
- Receive information from HMRC via the API platform.
Transferring data manually or by using "cut and paste" is not acceptable under Making Tax Digital.
Businesses can authorise HMRC to receive data from (and send data to) an agent, such as an accountant, on their behalf. If they have previously authorised HMRC to receive their VAT return from an agent they can still do this.
HMRC will allow a period of time - what it is calling the "soft landing period" - for businesses to set up digital links between all parts of their functional compatible software. HMRC says it expects "most businesses to use API-enabled commercial software packages both to keep digital records and file their VAT returns".