Notes

.The Making Tax Digital Action Pack has been updated to include a commentary on: Agent services account; Software Suppliers supporting MTD; Spreadsheets and bridging software; HMRC guidance. The full update is available to 2020 members in the Making Tax Digital M m





There are so many questions accountants will need answers to on the details regarding MTD for VAT. Specifically the definitions of what is “functional compatible software” (MTD compatible software), “bridging software” (which is not mentioned in the regulations) and what makes up a set of “compatible software”. Spreadsheets and their relationship with a set of software also needs addressing. All accountants will welcome further clarity from HMRC on these and some consistency on terms used by HMRC such as “electronic form’ and “digital links”.

The new regulations also raise a series of questions on applying MTD for VAT for businesses that have exempt supplies, are partially exempt, complex situations, are on particular VAT scheme and organisations like charities who have income outside the scope of VAT now needing to record such income.

What’s clear to us at 2020 is businesses over the VAT registration limit of £85,000 need to address MTD for VAT urgently and more clarity from HMRC will help. In the meantime you should be converting your clients to a cloud accounting package which will encourage digital record keeping and therefore compliance with MTD reoulations.




2


emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation);

XML, CSV import and export, and download and upload of files;

API transfer; or

linked cells within or between spreadsheets. The transfer of information by the use of copy and paste or cut and paste does not meet the requirement for a digital link

For the first year, HMRC will not enforce the requirement to have digital links in place. This is to allow some more time for links between legacy systems to be made digital. During this period manual transfer of data between different systems is permitted but the final transfer of data into the MTD compliant software product from which the return is filed must be digital.

MTD for VAT functional compatible software must able to:



Food and drink. animals, animal feed. plants and seeds Sport. leisure, culture and antiques Health, education, welfare and charities Power, utilities, energy and energy saving, heating Power Building and construction. land and property Transport, freight, travel and vehicles Printing, postage, publications books, magazines and newspapers Clothing and footwear, protective and safety equipment Financial services and investments, insurance



These rates may only apply if certain conditions are met. or in particular circumstances. depending on some or all of the following:

VAT rate conditions

who’s providing or buying them

where they’re provided

how they’re presented for sale

the precise nature of the goods or services whether you obtain the necessary evidence whether you @Mght records whether they’re provided with other goods and services

Other conditions may also apply.

There are also specific VAT rules for certain trades such as builders and charities that affect how you account for VAT. how much you must pay and how much you can reclaim.

Goods exported outside the EU or sent to someone registered in another EU country are zero-rated, subject to conditions. You can read more about VAT on goods sent overseas.

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International trade


Advantages


Being VAT registered is often advantageous as it allows you to recover VAT on your business expenditure. Day to day, you Will incur expenses including VAT (such as purchasing a new business laptop), being registered Will allow you to lower your tax bills and improve your tax efhciency. Being VAT registered is a great way to convey a professional image for your company and show greater financial stability to potential clients. When looking for contracts, many businesses will specify that they Will only engage With limited companies who are registered. Just as you are able to claim back the VAT you have incurred, your clients will also have the opportunity to claim back the VAT on your invoices so they won’t be out off bv the extra VAT charges.



Method

There are several VAT schemes contractors can register to, including; the standard rate VAT scheme, VAT flat rate scheme, annual accounting VAT scheme and cash accounting scheme, though the latter two are less Widely used by small businesses.

It’s important to occasionally review the VAT method used by your company; this will both help you to stay on top of any VAT rate changes and keep your tax bill as low as possible. For example, consider if you would be better moving away from flat rate VAT to the standard or cash accounting scheme or vice versa.



Frs


While the F RS has typically been the scheme of choice for small businesses to pay and reclaim VAT, changes introduced in April 2017 to limit potential abuse of the scheme and ensure all businesses paid the appropriate taxes, has made FRS less benehcial for contractors. The introduction of a new flat rate category, the Limited Cost Trader (LCT), sets a rate of 16.5% for businesses whose VAT eligible expenditure on goods is:

Less than 200 of their VAT inclusive turnover, or

0 Less than £1,000 in total per year The key change here is the definition of goods. When working out the amount spent on goods, it cannot include purchases of any capital expenditure 1; a accoi‘ nnrnkocnc (MA nr Hank nr


Input

.Some supplies you are likely to use that incur VAT include; accountancy fees, fuel, large hotel and restaurant chains, multistory car parking and most purchases from large UK suppliers. You can also reclaim VAT on your business mileage. VAT is only claimable on mileage for a car or motorbike that uses petrol, diesel or gas. You can not claim back VAT on fully electric vehicles. VAT also can’t be claimed back on business entertaining expenses.

VAT rate can commonly be found on your purchase receipts, the main rates are:




VAT rate can commonly be found on your purchase receipts, the main rates are:

0 Standard (20%): The VAT rate charged on most expenses 0 Exempt: Bank charges, postage, insurance, and mortgage interest 0 Zero: Train tickets, flights, books, newspapers, food (except hot prepared food to eat i' or takeaway Which is standard rated) . Reduced (5%): Domestic fuel 8: power, energy saving materials Don’t forget that with any VAT claim, you should have a corresponding receipt With enough VAT to cover the claim; this includes any fuel receipts.


Existing regs: businesses are required to reconcile cash payments and receipts back to underlying invoices

Purpose is to ensure oonect VAT split recorded

MTD regs: introduce a requirement for a digital record of each transaction

Transaction by transaction requirement applies even when cash accountir

The cash accounting scheme will cominue under MTD . Benefits 01 the cash accounting scheme

Output VAT is pand when payment Is received lor sales The drawback

Input VAT cannot be reclaimed until payment has been made t

For supplies made: Tho lime 0! supply The value 0! Iho suppIy The vale o! VAT charged For supplies received The lune 0! supply The value 01 the supply Tho amounl 0! input VAT to be rodanmed

What needs to be recorded?

necoramg keeping and cash accounting

M TD and the cash accounting scheme