Making Tax Digital - all about digital record keeping
Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC estimate there's over £9 billion a year lost to HMRC because of "avoidable mistakes", and Making Tax Digital (MTD) aims to capture some or most of that money.
VAT-registered businesses with a taxable turnover above the VAT threshold are required to use the Making Tax Digital service and to keep records digitally. Here we explain what that means.
The main requirement in brief
The requirement to keep digital records does not mean that businesses will have to scan and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer but each individual transaction (not summaries) will need to be recorded and stored digitally.
HMRC would like to encourage records to be kept in as near to real time as possible, but it will still be possible to create the digital records at quarterly intervals, using a bookkeeper or other agent if required, provided the information is entered into a digital record keeping system at that stage.
And the detail is....
The regulations require the following records to be kept digitally:
- The name of the business or organisation.
- The address of the principle place of business.
- The VAT registration number.
- Details of any VAT accounting schemes used.
For supplies made:
- The time of supply.
- The value of the supply.
- The rate of VAT charged.
If multiple supplies subject to the same rate of VAT are made at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.
The corollary applies: if an invoice has supplies at different rates of VAT (eg, adult’s and children’s shoes) there must be a separate digital record for each rate of VAT charged. You must split the total value of supplies on the invoice and make a separate entry in the digital records for each rate of VAT charged. This is needed to meet the requirement to have a record of outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs. There is a relaxation for mixed rate supplies at a single inclusive price (eg, meal deals).
For supplies received:
- The time of supply.
- The value of the supply including any VAT that is not claimable by the business.
- The amount of input tax to be claimed.
If there is more than one supply on an invoice the business can record the totals from the invoice.
The VAT account is the link - the audit trail - between the business records and the VAT return. The information required to be held in the VAT account must be kept digitally (the regulations refer to this as the “electronic account”), and the information in that electronic account will be used by functional compatible software to calculate and fill in the VAT return.
To show the link between the output tax in the records and the output tax on the return, the business must have a digital record of:
- The output tax it owes on sales.
- The output tax it owes on acquisitions from other EU member states.
- The tax it is required to pay on behalf of its suppliers under the reverse charge procedure.
- The tax that needs to be paid following a correction or error adjustment.
- Any other adjustment required by VAT rules.
To show the link between the input tax in the accounting records and the input tax on the VAT return the business must have a record of:
- The input tax it is entitled to claim from business purchases.
- The input tax allowable on acquisitions from other EU member states.
- The tax that it is entitled to reclaim following a correction or error adjustment.
- Any other necessary adjustment.
Certain records, such as fuel scale charge calculations, partial exemption calculations and capital goods scheme adjustments, are not included in the list of records that must be kept digitally. Such adjustments can be calculated outside the digital records with a journal entry being made for each type of adjustment.
The cash accounting scheme which allows businesses to account for VAT on the basis of payments made and received rather than on invoices continues. Such businesses are, however, still required to record individual supplies made and received and creating digital records from bank statements alone will not satisfy the requirements.
Some software records reverse charge transactions and it is not necessary to have separate entries for the self supply and purchase. If the software does not record reverse charge transactions it will be necessary to record reverse charge transactions twice, once as a supply made and a second time as a supply received.
Records must be kept for six years (or 10 years if the business uses VATMOSS). Digital records will need to be maintained for six years following deregistration, but may be kept in alternative formats rather than in functional compatible software.
Digital record keeping requirements in particular situations
As explained in the previous section, the MTD regulations generally require a digital record of each and every transaction. There are exceptions for:
Retailers will be able to record gross daily takings (not weekly, monthly or quarterly) rather than each individual transaction. This means that there does not need to be a digital link between tills and the accounting records; recording the daily totals in the digital accounting records meets the requirements. Many businesses are using a retail scheme without understanding that they are doing so.
Flat rate schemes
The flat rate scheme will continue and digital records of supplies received will not be required (unless they relate to capital items which cost more than £2,000 including VAT).
The additional records required for margin schemes and the calculation of the marginal VAT charged do not need to be kept in digital form. These records must still be maintained in some format.
Records maintained by third parties
The regulations allow HMRC to issues notices to relax the digital record keeping requirements where it would be impossible, impractical or unduly onerous to comply.
The MTD for VAT notice allow supplies made by third party agents to fall outside the digital record keeping requirements until the point at which the agent supplies the information to the business. This allows a summary of supplies made by an agent to be treated as a single invoice to create the digital record. The example given is that of a letting agent and HMRC has confirmed that the relaxation also applies to barristers who can use summaries prepared by their clerk. This relaxation does not apply to records maintained by customers, employees or others such as charity volunteers who are not third party agents. HMRC is expected to issue further guidance to relax the requirements for supplies made in connection with one-off activities run by charity volunteers.
There is a similar relaxation for supplies received by third-party agents and for employee expenses. This relaxation does not apply to records maintained by suppliers so creating digital records from supplier statements is not permitted. There is currently no relaxation for petty cash.
What else do I need to know?