HMRC has announced that the second phase of Making Tax Digital for VAT (‘MTD’), originally scheduled for April 2020, has now been delayed by 12 months and will come into effect on the 1st April 2021. This is to help ease against the impact of the COVID-19 crisis.
Phase 2 relates to businesses who are VAT registered but whose sales are under the VAT threshold (currently £85,000).
This 'phase two' required businesses to digitally link their software all the way from entry of each transaction at one end of the process through to submission of the VAT return at the other, irrespective of how many pieces of software were used.
This means the rules on maintaining digital links from original transaction to tax return will not be enforced until 1 April 2021.
Businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place. HMRC have updated VAT Notice 700/22 Making Tax Digital to reflect this extension.
Digital links summary
MTD requires businesses to maintain relevant information about sales and purchases in an electronic format, using 'functional compatible software'. This means a software programme which allows information to be recorded in an electronic form which sends and receives information to/from HMRC using the API platform (including API-enabled spreadsheets). It is possible to use more than one software programme but there must be a digital link between them.
Broadly, the functions of the compatible software must include:
- keeping records in a digital form as required by regulations;
- preserving digital records in a digital form as required by regulations;
- creating a VAT return from the digital records held in functional compatible software and providing HMRC with this information digitally;
- providing HMRC with VAT data on a voluntary basis;
- receiving information from HMRC via the API platform in relation to a relevant entity's compliance with obligations under the regulations.
Digital records can be kept in a range of compatible digital formats. They do not all have to be held in the same place or on one piece of software. For example, a spreadsheet can be a component of digital record keeping provided the product that consolidates records, or summary records from the spreadsheet, can exchange data digitally with HMRC.
If you have any queries about this, please drop me a line.
Steven Hillman ACA
Tel: 01934 444100