The HMRC soft landing period was designed to ease the transition to Making Tax Digital (MTD) compliance for UK VAT registered businesses. However, plenty of businesses have still not set up their MTD for VAT solution, believing in error that they don’t have to do anything until after April 1st 2020.
HMRC is ready to issue fines for non-compliance, so time is running out to ensure your business doesn’t get caught out by the new rules!
Back to basics: what is MTD for VAT?
Making Tax Digital for VAT is HMRC’s first step towards their ambition to become one of the most digitally advanced tax administrations in the world. It means that VAT-registered businesses with a turnover above the taxable threshold will need to keep digital records and submit their VAT return data to HMRC using a digital link.
Copy (or cut) and paste, or manually typing figures into a return is no longer permitted. A digital link is necessary as MTD for VAT aims to recover some of the £9 billion lost to avoidable errors each year.
What is digital record keeping and digital links?
The idea behind digital record keeping is that your business must hold VAT information in digital form, thereby erasing the possibility of manual errors when transferring the data to a VAT return. For each supply, you must record the tax point (time of supply), the value (net, excluding VAT), and the rate of VAT charged.
The business’ VAT details must also be held digitally, including the business name, principal address, VAT registration number, and details of any VAT accounting scheme used – such as the flat rate scheme.
You can use Excel spreadsheets to record this information under MTD for VAT rules, but must then digitally link the data to your VAT return within the spreadsheet. Under the law, “a digital link is an electronic or digital transfer, or exchange of data, between software programs, products or applications.” Bookkeeping and sales systems are also valid methods of recording data. The information that makes up the VAT return must be transmitted to HMRC in MTD-compliant form using authorised software, like MTDfVAT.
What is the soft-landing period?
The first wave of mandated businesses were brought under Making Tax Digital for VAT from April 1st 2019, but HMRC allowed a year-long soft landing period during which time copy (or cut) and paste remained a valid method to create a VAT return. This period was designed to enable businesses to adjust to the new rules and put in place digital record keeping and digital links.
After April 1st 2020, HMRC will begin enforcing Making Tax Digital rules and applying penalties for non-compliance.
Updated penalties system
With the end of the soft landing period, HMRC is also introducing a new system of penalty points for late MTD for VAT submissions. This update brings the system in line with the current set up for income tax and corporation tax. After April 1st 2020 you will incur one penalty point for a missed VAT return, with fines beginning after four accumulated points for missing quarterly or monthly VAT returns.
HMRC will also impose interest charges for late MTD for VAT payments.
If you are late submitting by 15 days, then there’s no penalty interest. Between 15 and 30 days late will see a penalty interest rate of 50% of the HMRC interest rate charge, and more than 30 days late incurs a 100% charge plus daily interest.
MTDfVAT – The total solution for Making Tax Digital for VAT
Using bridging software is the simplest way to become MTD for VAT compliant. MTDfVAT allows you to maintain your current bookkeeping and sales systems, using CSV imports to build your VAT return within the software. It also works with spreadsheets, allowing you to record your data and link it to a digital return in a few easy steps.
April 1st is coming, and if you aren’t ready for MTD for VAT then we can help! Sign up to MTDfVAT here.
Now is the time to act – HMRC is prepared to start fining organisations that do not comply.
Sign up to our newsletter to get the latest from Business Advice.