Your Making Tax Digital for VAT questions answered (even the difficult ones)
With Making Tax Digital (MTD) for VAT starting on the 1st April 2019 there’s not long left to familiarise yourself with your new responsibilities. To help you get up to speed quickly, we’ve answered the most common questions that we’ve received from accountants over the last few months in this handy guide.
Click through to your most pressing question or read on to take in the full list:
- What is MTD for VAT?
- When does MTD for VAT begin?
- Will FreeAgent be ready?
- How will MTD VAT filing be different in FreeAgent?
- What should I be doing to prepare?
- Who can file the return?
- Are the deadlines for VAT return submissions still the same?
- What about VAT special schemes?
- What needs to be submitted?
- What information needs to be stored?
- What about VAT registered businesses with turnover below the threshold?
- What’s next on the MTD agenda?
1. What is MTD for VAT?
MTD for VAT is the first major phase in the Making Tax Digital initiative – the government’s plan to make tax administration more effective, more efficient and easier for taxpayers through the introduction of a fully digital tax system. VAT-registered businesses with turnover above the VAT threshold will be required to digitally record their bookkeeping and submit VAT returns using MTD-compatible accounting software. All VAT returns will have to be filed through HMRC’s new MTD APIs (the interfaces that enable accounting systems to communicate with HMRC’s systems) instead of through the existing portal.
2. When does MTD for VAT begin?
Businesses under the scope of MTD for VAT will have to make their first MTD-compatible submission for the first VAT period starting on or after 1st April 2019. If a business has a VAT accounting period that spans the 1st April 2019 start date, the return for this period won’t fall under MTD. In this case, the return for the next VAT accounting period will be the first that has to be completed using MTD-compatible software.
For example, if a business’s VAT quarter runs from 1st March to 31st May 2019, the VAT return for this period wouldn’t need to be an MTD submission. The business’s first compulsory MTD VAT submission would instead be for the following quarter ending 31st August.
Switching to MTD-compatible software
You should be aware that if a business’s accounting period doesn’t match the dates of the tax year, your client may be better off making the switch to compliant software before the MTD for VAT start date to avoid the complication of switching accounting software part-way through an accounting year.
3. Will FreeAgent be ready?
Of course! We’ve had digital VAT filing capabilities for the best part of a decade and our experienced team of engineers – who are already intimately acquainted with the VAT process – are working closely with HMRC to ensure the transition is as smooth as possible. We’re rigorously testing our software to make sure our software is compatible with HMRC’s systems and that MTD VAT filing works in FreeAgent well ahead of time.
Our support team are also taking MTD for VAT training to ensure that they’ll be on hand to help get your practice ready.
HMRC has listed FreeAgent as one of the software suppliers supporting Making Tax Digital for VAT and we’re confident that FreeAgent will continue to be the best accounting software for your micro-business clients in the MTD era.
4. How will MTD VAT filing be different in FreeAgent?
Filing VAT returns through our software will be as simple as ever and once you’ve made your first MTD submission the process will remain largely the same. However, two-way communication with HMRC’s systems will improve the overall experience.
Through the use of oAuth technology (which allows a user to authorise a third party to access their account information while keeping their password hidden and their data secure) you’ll be able to connect your FreeAgent account to HMRC. This will continue to allow VAT return filing directly from the app with the touch of a button and will also allow client data that HMRC holds – such as information on outstanding liabilities and payments the business has made towards VAT – to be pulled into FreeAgent.
Your first MTD for VAT submission
During your first MTD VAT submission from FreeAgent you’ll be prompted to:
- click through to the HMRC website
- enter your credentials in order to receive a token which enables your data to pass securely between the two systems (this is automated – entering your credentials will automatically assign you a token)
- return to FreeAgent where the token will be stored for 18 months
This process means that your account dashboard will be authorised to file MTD VAT returns. If you switch to a client linked to your dashboard you’ll be able to file on their behalf, as long as they’ve authorised you to do so.
After this initial step, VAT filing in FreeAgent will involve the familiar process of checking the details, ticking a confirmation box and clicking the “submit” button.
5. What should I be doing to prepare?
MTD for VAT for small businesses
The rest of this guide focuses on what accountants need to do to prepare for the 1st April start date. To find out what small businesses need to know, check out our MTD for VAT guides for limited companies, sole traders and partnerships.
We’re working hard to ensure that the switch to MTD is as painless as possible for your practice, but there are a few things that you need to do:
- Determine which clients fall under the scope of MTD for VAT – if you’re using FreeAgent, you can use our dashboard reporting functionality to run turnover reports across your whole client base.
- Ensure all clients who fall under the scope of MTD for VAT are using MTD-compatible software, like FreeAgent – our client segmentation spreadsheet for MTD is perfect for this task.
- Communicate with your affected clients about their new obligations - you can use the MTD email templates in our preparation guide.
- Set up an agent services account with HMRC.
- Add all clients who fall under the scope of MTD for VAT to your agent services account and subscribe them to MTD. You should only take this final step when you are ready to file through MTD – as soon as you subscribe a client, HMRC will expect the next return to be MTD-compatible.
The agent services account in steps three and four is different to your current Government Gateway account and is the account you’ll use to access the majority of HMRC online services when MTD rolls out.
In most cases, in order to subscribe a client to MTD with an agent services account you’ll need your client’s VAT Registration Number (VRN), Company Registration Number (CRN) and National Insurance Number (NINO).
When MTD comes in, your affected clients will have to confirm that they can be added to your account via their own HMRC online account. It’s a good idea to chase up your clients and make sure that they have valid Government Gateway credentials ahead of time to save you chasing them up at the last minute!
6. Who can file the return?
Both you – the agent – and your clients will be able to submit VAT returns. If your client has already authorised you to file their VAT returns, their authorisation will be passed on to your agent services account. In order to file VAT returns for new clients, or clients who have not yet authorised you to do so, you’ll have to seek their authorisation.
When you have your agent services account set up you’ll be able to send affected clients an invitation to authorise you. This process might take a while, especially if you have a lot of clients to seek authorisation from, so make sure you communicate this step well ahead of time.
Once your client authorises you to submit their returns, your existing working relationship for VAT can continue in the same way, whether your client inputs the data for you to review and file or they give you raw data to input.
7. Are the deadlines for VAT submissions still the same?
Yes, after the MTD for VAT deadline the payment deadlines and the frequency with which businesses have to file VAT returns will be the same as they are right now. This applies to monthly, quarterly and annual VAT return schemes.
You will continue to make error corrections on VAT returns on the following quarter’s VAT return or by writing to HMRC.
No penalties during soft landing period
There won’t be any penalties for not complying with the new MTD for VAT rules in the “soft landing” period between 1st April 2019 and 1st April 2020.
8. What about VAT special schemes?
Eligibility for VAT special schemes, such as the Flat Rate Scheme, will remain the same. Businesses eligible to submit annual VAT returns will still be able to do so under MTD.
9. What information needs to be submitted?
While businesses will need to keep a record of all their transactions in MTD-compatible software, HMRC only requires summary data in each VAT submission. This takes the form of the familiar nine boxes on the VAT return:
- VAT due on sales and other outputs
- VAT due on acquisitions from other EC member states
- Total VAT due (the sum of boxes 1 and 2)
- VAT reclaimed on purchases and other inputs (including acquisitions from the EC)
- Net VAT to be paid to Customs or reclaimed by you (Difference between boxes 3 and 4)
- Total value of sales and all other outputs excluding any VAT
- Total value of purchases and all other inputs excluding any VAT
- Total value of all supplies of goods and related costs, excluding any VAT, to other EC member states
- Total value of acquisitions of goods and related costs, excluding any VAT, from other EC member states
10. What information needs to be stored?
Remember that the above is the information that has to be submitted for VAT; under MTD your clients will also be required to store certain information digitally. This should include, for each supply:
- the time of supply (tax point)
- the value of the supply (net excluding VAT)
- the rate of VAT charged
Records should also include your clients’ business name, business address, VAT registration number and details of any VAT accounting schemes they use. All this information is automatically stored and updated in FreeAgent.
If you need to make adjustments to your VAT figures (for example, if your client is partially exempt from VAT) the calculations and supplementary data that get you to your final figures don’t have to be stored.
All this information is already required for VAT returns under the current system and there is no additional information you or your clients need to store or submit for MTD for VAT. However, this information will need to be stored digitally after the MTD for VAT start date.
11. What about VAT-registered businesses with turnover below the threshold?
Businesses with turnover below the VAT threshold can voluntarily join MTD for VAT if they wish but will not be mandated to do so on April 1st 2019.
If turnover for a business subscribed to MTD for VAT falls below the VAT registration threshold, the business must continue to follow the rules for MTD until it deregisters for VAT.
At the end of each month you should continue to check each client’s turnover for the previous 12 months to check if it exceeds the threshold. If it does, MTD for VAT will apply from the first day of the following month.
12. What’s next on the MTD agenda?
Further details will emerge as the pilot scheme progresses and we’ll be sure to keep you updated. Check out our Making Tax Digital guides and resources for more information.