Digital tax records: Next step for VAT-registered businesses

VAT-registered farm businesses should switch to electronic record-keeping without delay or risk being caught by HMRC’s Making Tax Digital (MTD) legislation, say accountants.

The move is the latest step towards digitalising the tax system and represents the biggest change to VAT in decades, according to Andrew Robinson, head of agriculture at accountant Armstrong Watson.

The aim is to reduce administration costs and errors associated with hard copy records. Ultimately, HMRC wants businesses to file transactions as they are made to cut risks of data being lost over time between tax deadlines.

In the first phase, which began in 2019, businesses with taxable turnovers above the VAT threshold of £85,000 had to make the change.

See also: Diversification case studies and advice 

The net is now being widened to capture all VAT-registered businesses, regardless of whether they reach the £85,000 threshold.

The deadline for compliance is April 2022, but businesses should not delay. The switch requires fundamental changes to logging details and purchase of approved software.

What has changed?

Currently, VAT bills are paid to HMRC by completing a return through the HMRC online gateway. Details are entered directly into HMRC’s online form or via a spreadsheet file.

However, after the April 2022 deadline, VAT returns will only be accepted through an application programming interface (API) using accounting software.

While HMRC has agreed to allow business managers to continue using spreadsheets, this data will now require reformatting using so-called bridging software before submission, Mr Robinson said.

What data should be filed digitally?

Details that must be provided digitally include:

  • Business name and principal address
  • VAT registration number
  • A record of any VAT accounting schemes used
  • Details of each supply made including date (tax point), value and VAT rate
  • Details of every supply received including date (tax point), value, any VAT not claimable and input tax

What software should be used?

Importantly, all software and accountancy package submissions must meet HMRC requirements.

Examples of HMRC-approved software include Xero, Quickbooks, Sage and Zoho, but there are dozens more.

A comprehensive list of approved software is available on the HMRC website

Software package functions

  • Process and store records into a digital format

  • Create a VAT return from the digital records

  • Provide HMRC with VAT data on a voluntary basis

  • Receive notifications to the firm or their tax agent from the HMRC

Which software is best?

Which software package to use and on what device – phone, tablet or desktop – is down to preference and cost considerations. Many accountancy firms will already have bought into a system so it is worth considering using the same package to make transactions easier.

HMRC has suggested that the cost of implementing MTD is about £70/year. But the Institute of Chartered Accountants has suggested it is far higher with software purchases, training and ongoing support amounting to £1,250.

Is training necessary?

The HMRC will accept whatever values are submitted, but the responsibility to ensure it is accurate lies with the business owner. Understanding the software is vital to ensure submissions are not made in error.

Because each of the accounting packages works slightly differently, it is well worth undergoing training before using the system, Mr Robinson advised.

What pitfalls have been encountered?

Entering the wrong details and filing data without checking are the main simple errors being made. Also, it’s easy to press “return” and assume the data has been received by HMRC’s server.

It is easy to press return and think that is job done. But sometimes there can be a breakdown between the HMRC server and the farmer’s package and the details are left unsent, Mr Robinson said. 

A key tip, then, is to ensure the box requesting a confirmation email from HMRC is ticked.

This should be done both when filing the return and then when the payment is made. 

While registration and choosing software may not take long, Mr Robinson advised that businesses leave time for a “practice quarter” to have a trial run. In the first phase, those who left it to the last minute were those who had the most difficulty, he said.

Who can opt out?

In exceptional circumstances a business may be allowed to opt out. But exemptions must be accepted and permission granted by HMRC. Possible reasons to opt out:

  • Age
  • Disability
  • Location (lack of broadband)
  • Requirement is contrary to religion

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

Find out more