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Making Tax Digital for VAT in 2022

Victoria Andrews, Assistant Manager, VAT and Customs Duty services
25/10/2022
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Important changes are coming on 1 November 2022 – will I be affected?

From 1 November 2022 all businesses, unless you fall into one of the limited exceptions below, will be required to sign up for Making Tax Digital (MTD) and submit VAT returns using Making Tax Digital compatible software. 

A failure to do so will mean that most businesses submitting VAT returns on a quarterly or monthly basis will be unable to do so as the existing VAT online account can no longer be used to submit VAT returns from this date. 

What exceptions apply? 

  • HMRC has recently announced that those businesses with a taxable turnover of less than £85,000 per year will be able to use its online VAT account to file the VAT return due on 7 November 2022. Subsequent VAT returns cannot be submitted through the existing online VAT account.   
  • Businesses submitting VAT returns annually will be able to do so under the existing VAT online account until 15 May 2023.
  • If you apply to HMRC for exemption from MTD and HMRC agrees this. You can apply to HMRC for exemption from MTD if it isn’t practical or reasonable for you to use technology (including software and computers) to prepare and submit your VAT returns. HMRC considers applications on a case by case basis. 

Penalties

HMRC has recently published details of the penalties they will charge for those businesses that fail to comply with Making Tax Digital.

In summary:

Scenario  HMRC penalty 
If you file your VAT returns, but do not use functional compatible software to do so

HMRC may charge up to £400 for each VAT return filed dependent on your annual taxable turnover (VAT exclusive):

  • £100,000 and under: £100 penalty
  • £100,001 - £5,600,000: £200 penalty
  • £5,600,001 - £22,800,000: £300 penalty
  • £22,800,001 and above: £400 penalty
You do not keep the required records digitally within your functional compatible software HMRC may charge a penalty of between £5 - £15 for each day this requirement is not met
You do not use the required digital links to transfer data between different pieces of functional compatible software   HMRC may charge a penalty of between £5 - £15 for each day this requirement is not met

If your software has checking functions, HMRC expect you to use these. It has not been made clear yet as to how this will be applied but HMRC’s guidance does state that a penalty of up to 100% of the VAT you owe could be levied if your return is submitted with errors and the checks were not applied. We have yet to see this applied in practice but suggests it might be something that HMRC start to look at in more detail going forward.

A new year and a new update for UK VAT-registered businesses

To date, HMRC’s move to MTD for VAT has affected UK VAT registered businesses with an annual turnover above the VAT registration threshold of £85,000:

  1. Phase one: this came into effect from April 2019 and was considered to be a ‘soft landing’ period. Phase one required businesses with an annual turnover above the UK VAT registration threshold to submit their VAT returns electronically.
  2. Phase two: originally planned for April 2020, this was delayed for a year due to COVID-19. As a result, this applied to VAT return periods starting on, or after, Thursday 1 April 2021. As part of phase two, businesses were required to have in place digital links between their source/original data all the way through to the final VAT return figures submitted to HMRC.

Our previous article Making Tax Digital for VAT- the end of the ‘soft landing’ period for businesses, provides further details on the use of digital links.

What records do I need to keep digitally?

HMRC requires the following information to be kept digitally:

Designatory data Supplies made Supplies received  Adjustments  Reverse charge transactions  Other 

Your business name

Your business address

Your VAT registration number

Any VAT accounting schemes that you use

For each supply you must record the:

Time of supply (tax point)

The value of the supply (the net value, excluding VAT)

The rate of VAT charged

For each supply you must record the:

Time of supply (tax point)

The value of the supply (the net value, excluding VAT)

Amount of input tax you will claim 

Any adjustments required from calculations made outside of your functional compatible software for any VAT accounting schemes you use.

Any other adjustments you may make, for example input tax restriction, road fuel scale charges etc.

If your software does not record reverse charge transactions, you will need to record these twice: once as a supply made, and a second time as a supply received.

You will also need to keep copies of documents that cover multiple transactions made on behalf of your business, for example those made by employees for petty cash expenses.

N.B. all transactions must be recorded in your electronic account, but you do not need to scan paper records such as invoices or receipts.

What changed from 1 April 2022?

From the first VAT period starting on or after 1 April 2022, VAT registered businesses with an annual turnover below the VAT registration threshold (and therefore not already signed up to MTD) were required to sign up for MTD. Please note that this includes self-employed individuals and landlords.

In effect, from the first VAT period starting on or after 1 April 2022, all VAT registered businesses regardless of annual turnover became required to sign up for MTD for VAT and:

  • Keep their VAT records digitally, as well as
  • Submit VAT returns to HMRC through MTD compatible software.

MTD is mandatory and, as there is no equivalent ‘soft landing’ period, it is important that you:

  1. ensure your processes are MTD compliant
  2. are signed up in time for your next VAT return submission. 

What should I do to prepare?

  1. Take action to sign up for MTD, unless you fall within one of the exceptions listed above. If you consider yourself to be digitally exempt, you will need to apply to HMRC for exemption from MTD if you haven’t already done so. 
  2. Check whether your current VAT return processes are compliant with MTD, in particular the requirement for digital links.
  3. Ensure relevant persons/staff are aware of MTD, how it works and the requirements. 

Need more help?

If you would like to discuss how the MTD for VAT requirements affect you and what you need to do to ensure you are compliant, please contact Robert Marchant or your usual Crowe contact.

Insights

Guide on how to complete your VAT firm if you trade with businesses in the EU and/or worldwide.
Unsure if you have paid import VAT and if so how it is to be reclaimed?
We recommend action is taken now to be ready for 1 April 2022
Reduction of compliance requirements for UK businesses from 1 January 2022
Guide on how to complete your VAT firm if you trade with businesses in the EU and/or worldwide.
Unsure if you have paid import VAT and if so how it is to be reclaimed?
We recommend action is taken now to be ready for 1 April 2022
Reduction of compliance requirements for UK businesses from 1 January 2022

Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
London