From 1 April 2021, over 1 million UK VAT registered businesses face new MTD obligations, with penalties threated for the first time.

The changes only apply to UK VAT registered businesses, including foreign businesses with a UK VAT registration, with sale above the UK compulsory VAT registration threshold of £85,000.

The new requirements and penalties were originally delayed from 1 April 2020 due to the COVID-19 pandemic. Phase 1 of MTD was launched on 1 April 2019, introducing API based filing requirements through compatible accounting packages or bridging software/ spreadsheets to file VAT returns.

Phase 2 includes:

Digital record-keeping

  • Obliging the maintenance of key VAT transactional data in digital form
  • Some data may still be held in a non-digital form and digitally stored invoices may remove the need to retain paper invoices.

Digital links

  • Requiring the transfer of digital data between software programs or applications by digital means.
  • The digital journey must be uninterrupted, without manual transfers or adjustments.

What does this mean to you?

Digital record-keeping is mandatory for all VAT reporting periods beginning on or after 1 April 2021. Those businesses over the VAT threshold must therefore keep and maintain relevant VAT records digitally within functional compatible software.

The requirements to digitally store data will be expended to include sales and purchase invoices with VAT. Including business specific data such as trading details. Supplies made, reverse charge transactions, Supplies by third parties, supplies received and summary VAT return data, including adjustments.

What about digital links? Simply this is an electronic or digital transfer, or exchange of data between software programs, products and applications.

Digital links may include:

  • linked cells on or between spreadsheets, including macros
  • emailing spreadsheet, CVC or similar data where it is then uploaded into other software for the return preparation
  • Transfers via memory sticks or similar portable devices
  • XML and CSV imports or exports
  • API transfers

They exclude:

  • ‘Cut and paste’ manual process to move data
  • Any manual adjustment and consolidation of group returns in spreadsheets

Manual VAT calculations exemptions

There are exceptions in the uninterrupted digital journey. In particular, HMRC has granted an exemption on manual calculations for special vat schemes including the capital goods scheme, flat rate, daily gross takings or partial exemptions.

HMRC has also offered an option to apply for a further extension to this deadline, if it can be shown there is no reasonable fix to IT issues and the operation of an uninterrupted ‘digital journey’. if applying for this extension, you must include a comprehensive plan to resolve any break in the digital journey.

Extensions may be refused if cost alone is your justification. If commercially available software is part of your plan to resolve any break, the application is also likely to be rejected.

New MTD penalty regime

Lastly, as we have already had a two year ‘soft landing’ period, in which businesses could demonstrate they made best efforts to comply with the new MTD filing obligations, penalty’s will be applied for non compliance.

From 1 April 2021, the standard VAT penalty regime applies on late filings, plus on failure to keep digital records and maintain a complete digital journal.

  • First default- This is recorded for failure to observe the MTD rules or late filing.
  • If you fault again- Tax payers enter a surcharge period, lasting 12 months. Surcharge penalties are calculated using a percentage of the VAT due on the latest return. The percentage depends on annual turnover.
  • An accumulated points system then applies for further faults if they happen within 12 months. The 12 month surcharge period is reset each time there is a new fault.
  • The points translate into increases in the percentage of surcharges for each accumulated default. They start at 2% and scale up to 15%.

This may all sound over whelming but it really doesn’t need to be.

Here at Pattinsons we will happily ensure you are using the correct software and systems to take the stress away from MTD compliance.

Call us today on 02476375777 to see how we can help you.