Good habits are repeated actions or behaviours that have positive consequences. In business, good habits can save you time, money and effort. They can enable your business to be more productive, profitable and successful. And this is true in all areas, including tax, especially following the introduction of Making Tax Digital.
What is Making Tax Digital?
Making Tax Digital (MTD) is a huge government digital initiative that will transform the UK tax system. Under MTD, all VAT-registered businesses will need to maintain digital financial records and use third-party software to submit their tax returns to HMRC.
You can either use MTD for VAT-compatible third-party software or bridging software to connect non-compatible software (including spreadsheets) to HMRC systems.
MTD is being introduced in phases and in the coming years it will affect Income Tax and Corporation Tax. Since 1 April 2022, all VAT-registered businesses (including those that are registered voluntarily) have been required to comply with MTD for VAT rules.
So, what good MTD for VAT habits should you adopt and how could they help your business?
1 Make sure your MTD for VAT digital records are complete
You need to keep digital records of:
- your business name, address and VAT registration number
- VAT accounting schemes you use
- VAT on goods or services you supply
- VAT on goods or services you receive
- any adjustments you make to a VAT return
- “time of supply” and “value of supply” (ie value excluding VAT) for everything you buy and sell
- rate of VAT charged on goods and services you supply.
You may also have to keep digital records of:
- reverse charge transactions (ie where you record the VAT on both the sale price and purchase price of goods and services you buy)
- your total daily gross takings if you use a retail scheme
- items you reclaim VAT on if you use the Flat Rate Scheme.
Did you know? HMRC can visit you (by appointment or not) to inspect your VAT records (they're called “compliance checks”) and if your VAT records are not in order, HMRC can issue a penalty.
2 Regularly update your MTD for VAT financial records
According to HMRC, businesses that use real-time financial record-keeping can become more productive, because their software provides an up-to-date snapshot of their finances, and it may provide additional efficiency-boosting functionality because financial record-keeping can be integrated with other business processes.
You should get into the habit of updating your VAT records on transaction dates (ie when you pay money out or receive income). If that isn't possible, do it as soon after as you can. Make it a regular habit, so that VAT record-keeping remains manageable and not something you dread and avoid. Get it done in good time, long before your quarterly update must be submitted. It could make your life much less stressful each quarter.
3 Always issue your MTD VAT invoices as soon as possible
MTD for VAT invoices must usually be issued within 30 days of the date of supply or date of payment if you're paid in advance.
- For goods, the date of supply is the date they're sent, collected or made available.
- For services, the date of supply is the day the service was supplied or completed if it was supplied over a number of days.
Get into the habit of sending your VAT invoices as soon as you can; then the payment date won't be extended unnecessarily, which is better for your cash flow, because you should get paid sooner. You're also less likely to forget to produce a VAT invoice and it will mean all of your VAT invoices are raised in the correct quarter.
4 Correct any MTD for VAT errors ASAP
Correcting mistakes in your VAT accounting software is simple enough but do it as soon as a mistake comes to light. Then you'll more accurately be able to forecast cash flow and work out your tax liability.
If you've made an error in a VAT return, your VAT account must detail the date you discovered the error, explain how it arose and what you did to correct it.
You can make adjustments (in your next VAT return) to correct VAT return errors if: the value of the error is £10,000 or less; it's not deliberate; and it's for an accounting period that ended less than four years ago. Other errors must be reported to HMRC (you fill out a VAT652 form and send it to HMRC. Penalties and interest can be charged if an error is caused by carelessness or dishonesty.
5 Always submit your VAT returns and pay your VAT bills on time
Making Tax Digital for VAT doesn't alter your VAT return filing deadlines.
- The deadline for submitting your VAT return online and paying HMRC are usually one calendar month and seven days after the end of an accounting period (it's different if you use the VAT Annual Accounting Scheme).
You must pay any VAT due to HMRC by direct debit or online bank transfer. There can be surcharges and/or penalties for late filing and payment. If you submit a late return, a surcharge won't be payable if you pay your VAT in full by the deadline.
Did you know? The rules concerning penalties for late submission of VAT returns and late payment of VAT bills changed to a points-based system for accounting periods starting on or after 1 January 2023. Since then, a penalty point is issued for each late VAT Return you send - even if you have nothing to declare. Once you reach your penalty point threshold, you'll get a £200 penalty. The threshold is set by your accounting period (monthly, quarterly or annually). You’ll get a further £200 penalty for each subsequent late submission while you're at your points threshold.