UK extends MTD digital record-keeping and filing obligations to 1.1 million taxpayers from 1 April 2022; builds on phase II, April 2021
The requirements around digital VAT record keeping and submissions through MTD-compatible software to HMRC are to be extended to around 1.1 million small taxpayers from 1 April 2022. These are businesses below the UK VAT registration threshold of £85,000, but have elected to VAT register for commercial reasons. Whilst VAT-registered, they have been exempt from the two-phase introduction of MTD for VAT that started in 2019. They make-up one-quarter of UK VAT-registered businesses.
It is forecast this extension will raise £400 million per annum by 2025. The UK’s MTD aims to tackle that part of the tax gap caused by error and failure to take reasonable care, by removing opportunities to make certain types of mistakes in preparing and submitting tax returns. This now includes filing UK VAT returns via HMRC’s Application Programming Interface (API) platform.
MTD Phase II – April 2021
The UK’s second phase of Making Tax Digital came into effect on 1 April 2021. This followed a 1-year delay, adding to the already provided 1-year ‘soft landing’ due to COVID-19. Phase 1 of MTD for VAT, using the API link to file a VAT return, came in on 1 April 2019.
MTD for VAT rules
Under the UK Making Tax Digital (MTD) VAT rules, updated for 1st April 2021 penalty regime, ‘Functional Compatible Software’ is a single program or set of programs, products or software applications that are able to:
- Record and store VAT digital records;
- Transfer data between accounting software and HMRC filing without manual intervention or cutting and pasting in spreadsheets.
- Submit to HMRC data for the completion of VAT returns via HMRC’s API platform; and
- Receive data and information in return from HMRC via the API platform.
Making Tax Digital – digital record-keeping since 1 April 2021
UK VAT registered businesses over the VAT registration threshold under the Making Tax Digital (MTD) rules must now keep and maintain relevant VAT records digitally within ‘functional compatible software’. This digital record keeping requirement was mandated on 1 April 2021, following the ending of ‘soft-landing’ first year phase of MTD. This includes sales and purchase invoices with VAT. Accounting records not specific to VAT return requirements are not included in this.
What are Digital Links for data transfer?
A digital link is an electronic or digital transfer or exchange of data between software programs, products and applications.
Since 1 April 2021, where there is a transfer of VAT data between accounting packages, ERP’s, invoice systems or electronic spreadsheets in the completion of the return, this must be done digitally without manual intervention. There must be digital links between the programs, apps etc., where there is any transfer, copy and pasting, recapture or modification of the data. Each piece of software must be digitally linked to create the digital journey.
Digital links may include:
- A digital link may include linked cells on spreadsheets
- Emailing spreadsheet, CVC or similar data where it is then uploaded into other software for the return preparation
- Transfers via memory sticks or similar portable device
- XML and CSV imports or exports
- API transfers
- But excludes ‘cut and paste’ manual process to move data
- Excludes manual adjustments and consolidations of group returns in spreadsheets.
Forbidden – manual adjustments within spreadsheets
Since 1 April 2021, taxpayers may still complete adjustments outside of their software, for example partial exemption, fuel scale charge.
These types of adjustments are allowed under MTD; however, taxpayers must post a journal into their software to reflect the adjustments before submitting their return through the software. The calculation does not need to be completed in the software, only the recording of the adjustment.
The UK has introduced a penalty system from 1 April 2021 for MTD for VAT. This will apply to the first complete VAT return on or after this date. The regime is as follows:
- A default is recorded for failure to observe the MTD rules or missing a filing.
- Taxpayers then enter a surcharge period, lasting 12 months,
- if the taxpayers faults again. Surcharges are % penalties of the VAT due on the latest return.
- An accumulated points system then applies for further faults if they happen within twelve months. (The twelve month surcharge period is reset each time there is a new fault.)
- The points translate into increases % surcharges for each accumulated default. They start at 2%, and scale up to 15%.