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Making Tax Digital for VAT in 2022

Victoria Andrews, Assistant Manager, VAT and Customs Duty services
27/06/2022
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Making Tax Digital for VAT -
update 31 May 2022

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
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 Making Tax Digital for VAT (MTD) 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 articles 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 is changing 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 are therefore not already signed up to MTD) will now be 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 will be 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 for this next phase of MTD, it is important that you:

  1. ensure your processes are MTD compliant, and
  2. are signed up by the relevant date.

Important dates

VAT Return Periods First VAT return affected by MTD VAT return submission date
Monthly April 2022 (04/22 VAT return) 7 June 2022
Mar/Jun/Sept/Dec June 2022 (06/22 VAT return) 7 August 2022
Jan/Apr/Jul/Oct July 2022 (07/22 VAT return) 7 September 2022
Feb/May/Aug/Nov August 2022 (08/22 VAT return) 7 October 2022

When should I sign up for MTD?

Whilst, in practice, you will be required to sign up for MTD before the relevant VAT return submission deadline, signing up ahead of this will ensure you have time to ensure the processes you have in place are MTD compliant and you don’t encounter problems on deadline day.

If you pay your VAT bill by direct debit, if you don’t sign up at the right time this can cause HMRC to take duplicate payments or, potentially, not take payment at all. For those businesses paying by direct debit, HMRC recommends that a business should sign up for MTD:

  1. at least 7 days before the first Making Tax Digital return is due, but
  2. at least 5 days after the last non-Making Tax Digital return is due.

What should you do to prepare?

  1. Check whether you will be required to sign up for MTD as of 1 April 2022 – there are limited exemptions for those considered to be digitally exempt,
  2. Confirm when you will be required to sign up for MTD with reference to the first VAT return due under MTD, and whether you make payments via direct debit,
  3. Check whether your current VAT return processes are compliant with MTD, in particular the requirement for digital links,
  4. Ensure relevant persons/staff are aware of MTD, how it works and the requirements,
  5. Check if you are eligible for the government’s Help to Grow: Digital scheme. Businesses that meet certain requirements can receive up to £5,000 in funding to cover up to 50% of the cost of certain approved software providers

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