Nine things you need to know about UK VAT rules

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The way VAT-registered businesses must keep their VAT records and file their returns has changed under Making Tax Digital (MTD). Here's what you need to know

1. You can't do your VAT bookkeeping on paper anymore

Maintaining paper records no longer meets the tax legal requirements. Since 1 April 2019, all VAT-registered businesses with a turnover over £85,000 have had to use MTD-compatible accounting software to keep their financial records. This software "talks" to HMRC so businesses can file their VAT returns at the touch of a button.

2. MTD does not apply if your turnover is below the VAT threshold

Businesses that have voluntarily registered for VAT but whose turnover is below the VAT threshold of £85,000 can opt out of using MTD software for their VAT records and filing. They will be able to continue using the Government Gateway to file their VAT returns.

3. The VAT information you have to submit to HMRC did not change

Under Making Tax Digital you keep the same kind of records that you always did. This includes:

  • The value of all sales you make, excluding VAT;
  • Details of all your purchases (exc. VAT);
  • The rate of VAT charged on each sale and purchase;
  • The date of all transactions;
  • The name and principle address of your business;
  • Your VAT registration number;
  • Details of any VAT accounting schemes you use.

4. You can keep using spreadsheets but using appropriate software is simpler

HMRC has said that businesses can continue to use spreadsheets but they must use special bridging software to transfer the data. Businesses are advised to keep all of their financial records in a digital format instead - making the move to appropriate software as soon as possible.

5. You'll need to choose the right accounting software to do your VAT return

The software or app that you use to do all your VAT accounts and filing must be compatible with Making Tax Digital. The software must be able to link to HMRC via an Application Programming Interface (API).

You can check the list of software providers on the HMRC website to see which are compatible. Most software providers are charging on a subscription basis - typical costs are between £10 and £30 a month.

6. The VAT deadlines haven't changed

Filing and payment deadlines for VAT have not changed. In time, however, HMRC is working towards a "real-time" system where taxpayers will be able to see their current tax liabilities at all times and keep up with payments on a pay-as-you-go basis.

7. The VAT rules aren't changing for everyone

The government has said that some "digitally-excluded" groups will not have to comply with Making Tax Digital. These include practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations and anyone for whom it is not "reasonably practicable" for them to use digital tools for reasons of age, disability, remoteness of location or for any other reason.

Those businesses that are subject to an insolvency procedure are also be excluded. If any of these conditions apply, then you'll need to call the HMRC helpline to make other arrangements for filing your VAT return.

8. Some businesses had longer to get ready for MTD for VAT

VAT-registered businesses with "complex requirements" did not have to comply until 1 October 2019. These included:

  • Those required to make payments on account;
  • Trusts;
  • Annual accounting scheme users;
  • Not-for-profit organisations that are not set up as a company;
  • Traders based overseas;
  • VAT groups and VAT divisions.

Most VAT registered businesses with a taxable turnover above £85,000 must now follow the rules for Making Tax Digital for VAT.

9. You need to officially sign up for Making Tax Digital with HMRC

It's up to business owners to sign up on the HMRC website. You'll need your Government Gateway user ID and password and your VAT registration number. Your accountant can file your VAT return for you, providing they are signed up to act on your behalf as your agent.

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