All VAT registered businesses must keep and preserve certain records and accounts. Under Making Tax Digital, some of these records must be kept digitally within functional compatible software. Records that are not specified in notice 700/22, or that are not required to complete your VAT Return, do not need to be kept in functional compatible software. The next few years will see many changes in the tax system and the manner in which returns and accounts are filed with HMRC.
Functional compatible software is a software program, or set of software programs, products or applications, that must be able to:
- record and preserve digital records
-provide to HMRC information and returns from data held in those digital records by using the API platform
-receive information from HMRC via the API platform
Software are products available that will perform all of the functions listed above. Some software programs will not be able to perform all of these functions by themselves.
For example, a spreadsheet or other software product that is capable of recording and preserving digital records may not be able to perform the other 2 functions listed above, but can still be a component of functional compatible software if it is used in conjunction with one or more programs that do perform those functions.
The complete set of digital records to meet Making Tax Digital requirements does not all have to be held in one place or in one program. Digital records can be kept in a range of compatible digital formats. Taken together, these form the digital records for the VAT registered entity.
For each supply you make you must record the:
- time of supply (tax point)
- value of the supply (net value excluding VAT)
- rate of VAT charged
This only includes supplies recorded as part of your VAT Return. Supplies that do not go on the VAT Return do not need to be recorded in functional compatible software. For example intra-group supplies for a VAT group are not covered by these rules. The time of supply is the date that you must declare output tax on. Typically this is when you send a VAT invoice or, if you are on cash accounting, when you receive payment for the supply.
What is interesting is that there is not a requirement for invoices to be issued from "Functional Compatible Software".
There are however a couple of issues that come from this.
For those issuing goods or services with invoices in the normal manner we would advise that these are done directly from the software. The reason for this is that the treatment differs for accounts and vat.
If the invoices are in the system then we can cover both things. If they are not in the system basic information must be input for vat and accounts, meaning that the same thing is being done 3 times!
The other issue is for shops where it will now be necessary to input the daily takings into the software and split this where different rates have been charged. This is an extra burden as up until now this was not necessary owing to the use of marginal schemes.
Please also remember that at this stage the rules are aimed at VAT. We do not want to have to change everything again when Corporation Tax is introduced a little further down the line.
Please contact us for advice on how to set up your invoices and issue these directly from software, help with the layout of an invoice or advice on recording daily sales.
If you wish to have a more detailed look at the changes please follow this link. https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat