Changes to VAT procedures

From 1 April 2022, businesses registered for UK VAT on a voluntary basis are required to comply with Making Tax Digital (MTD) procedures.

In this business surgery column, we look at who will be affected and what the new procedures are - and give a step-by-step guide on how to ensure compliance before the deadline. VAT-registered businesses, individuals and charities that are registered for VAT on a voluntary basis (typically those with turnover of less than £85,000) that are not already registered for MTD will be required to apply and follow the MTD rules from 1 April 2022. Once MTD registered, the following rules will apply. Firstly, all UK VAT registered businesses must keep and maintain VAT records digitally in “a compatible software package that allows you to keep digital records and submit VAT Returns” or use “bridging software to connect non-compatible software (like spreadsheets) to HMRC systems”. This requirement is compulsory for all VAT periods beginning on or after 1 April 2022. Records included under this requirement include sales and purchase invoices with VAT, but accounting records not specific to VAT returns are not included. The data that must be stored digitally includes your business name, address and VAT registration number; the VAT accounting schemes you use; VAT on goods and services you supply; VAT on goods and services you receive; any adjustments you make on a VAT return; the ‘time of supply’ and ‘value of supply’ for everything you buy and sell; and the rate of VAT charged on goods and services you supply. For those with reverse-charge transactions, digital data is required where you record the VAT on both the sale price and the purchase price of goods and services you buy. Similarly, if you use a retail scheme, total daily gross takings must be stored digitally; and, if you use the Flat Rate Scheme, information must be stored for the items on which you can recover VAT. Secondly, businesses must use digital links to submit VAT returns to HMRC. If more than one software package is used, the packages need to be linked digitally. Penalties and interest will arise for late, inaccurate or non-compliant returns with additional penalties levied for repetitive mistakes or false information. Penalties can be up to 100 per cent of the VAT due with interest charged at three per cent of the amount owing. If you are affected by this change, you must take action now to avoid penalties from HMRC. Options may include purchasing compliant accounting software, using a bridging tool or deregistering from VAT.