Advocates Making Tax Digital for VAT Questions and Answers

Tim Alter gave a lunchtime talk to the Scottish Bar on 1st March 2019. The members of the Faculty of Advocates were highly engaged in the session on Making Tax Digital for VAT. There was a lively and heartfelt response including a wide ranging discussion on VAT and the changes required to comply with Making Tax Digital. A recording of the talk is available from the Dean’s Secretariat. The Advocates Making Tax Digital for VAT Questions and Answers from the slido.com app are shown below.

Can I sign up for MTD before 1 April?

You can opt in to Making Tax Digital for VAT as part of the pilot. The pilot was opened for general release on 16th October 2018.

Can I still type in my figures on the HMRC website if I don’t want to change software?

After you’ve signed up for Making Tax Digital, you cannot use HMRC VAT online services to send VAT Returns. You will need to use compatible software. Alterledger recommends Xero as this is currently the only external software that Lex will connect to.

I use the Expensify app: is it MTD compatible?

The Expensify app will help you record expenses, but it will not prepare your VAT returns. You will need to connect Expensify to Xero or another MTD compatible software package to comply with MTD requirements. A list of MTD compatible software is available here: https://www.tax.service.gov.uk/making-tax-digital-software

Why would I have another bank?

If your sole trader transactions are mixed in with personal transactions, it makes your bookkeeping more complicated. Alterledger recommends that you have a bank account with a debit card that you use exclusively for your advocate / sole trader transactions. This means that you can link the bank account to Xero with a bank feed and this will establish part of your digital records to flow through to your VAT return.

Will my online HMRC DD account through which I pay income tax (which is same as VAT) change?

Your Direct Debit Instruction (DDI) for your VAT payments is completely separate from any other DDI you have with HMRC (e.g. for income tax). Registering for MTD for VAT and any changes to your VAT DDI will have no effect on any other DDI that you have.

If my accountant already uses Xero, what, if anything, would I need to do?

If you are already using Xero, check that your accountant has the Xero Making Tax Digital certification. If they do, then everything should be in hand to support you with your obligations under MTD. If you don’t already upload all your fee income and other sole trader income to Xero every month / quarter, you will need to start doing this. Alterledger uploads all the FSL information to Xero for advocate clients, your accountant should be able to do this for you too. To find a Xero accountant in your area please search the Xero advisor directory:
www.xero.com/uk/advisors/find-advisors/Parliament Square
www.xero.com/uk/advisors/find-advisors/Edinburgh
www.xero.com/uk/advisors/find-advisors/Glasgow

What happens if you do not register?

HMRC currently has the power to charge a penalty of up to £400 for filing a VAT return other than electronically without the prior agreement of HMRC (VAT regulations 1995 reg. 25A). This power has been rarely used but will be extended to the obligation to file VAT returns using functional compatible software.

How much do you charge for services?

Alterledger charges a fixed monthly fee for all your bookkeeping, VAT administration and annual accounts. The monthly price depends on the service you require. Factors to be taken into account include whether you have:

a separate bank account for your sole trader activities?
a bank feed to Xero? (Most banks will support bank feeds)
additional businesses (e.g. consultant / company director / partnership)
investment income
rental property income
an Airbnb empire

Why do you need to report rental income / why is rental income subject to VAT?

VAT notice 700/12 provides a summary of the values to be entered in your VAT return. Rental income is classified as “Exempt supplies” for the purposes of VAT. This does not mean the rental income is outside the scope of VAT. Exempt supplies must be reported in box 6 of your VAT return. Any associated expenses are also exempt so input VAT on these purchases can’t be reclaimed. Exempt sales do not present any problem for advocates on the standard scheme for VAT. Advocates on the Flat Rate Scheme for VAT will need to include rental income (from property held in their sole name) in their gross turnover. This means that 16.5% of rental income must be paid to HMRC.

Box 6 total value of sales and all other outputs excluding any VAT

Show the total value of all your business sales and other specific outputs but leave out any VAT. Some examples are:

zero rate, reduced rate and exempt supplies

Why is the flat rate scheme no longer advantageous for advocates?

Advocates will have to pay 16.5% of their gross turnover as limited cost businesses. Previously the Flat Rate Scheme (FRS) rate was 14.5%. If you continue to use the FRS you would have to pay the limited cost rate of 16.5%, which is more that the VAT than you would pay under the standard scheme.

To use the FRS rate of 14.5% advocates would have to show that they have eligible expenditure of at least 2% of turnover. Only goods count towards the 2% limited cost business threshold. Advocates typically purchase almost no eligible goods. VAT notice 733 has further information.

For a more detailed explanation of why the Flat Rate Scheme for VAT is not suitable for advocates, see my post VAT Flat Rate Scheme for Advocates.

The ‘low cost trader’ threshold for flat-rate scheme is costs of 2% of gross income. I thought our VATable FSL dues (etc) put us over that. Is this wrong?

FSL fees are all services. Only relevant goods count towards the 2% limited cost business threshold. Advocates typically purchase almost no eligible goods.

Relevant goods are goods that are used exclusively for the purposes of your business, but do not include:

vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
food or drink for you or your staff
capital expenditure goods of any value
any services

What records must be kept in digital format? If we must retain paper copies of receipts and invoices, is it necessary that a duplicate digital copy is kept?

The requirement to keep digital records does not mean that businesses are obliged to scan and store invoices and receipts digitally. Alterledger recommends using ReceiptBank to scan any paper invoices and receipts as you go to avoid losing relevant information. Businesses can continue to keep documents in paper form if they prefer but each individual transaction (not summaries) will need to be recorded and stored digitally. HMRC would like to encourage records to be kept in as near to real time as possible.

A digital copy of a receipt is sufficient (but not necessary) for HMRC. You need to retain access to financial records for at least 6 years after your year end. Bear in mind that if you ever switch from Xero to another software package, you will lose all your scanned documents stored in Xero. If you have used ReceiptBank to scan receipts etc, your documents will be stored for at least 10 years.

The regulations require the following records to be kept digitally:

Designatory data:

The name of the business or organisation.
The address of the principle place of business.
The VAT registration number.
Details of any VAT accounting schemes used.

For supplies made:

The time of supply.
The value of the supply.
The rate of VAT charged.

If multiple supplies subject to the same rate of VAT are made at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.

The corollary applies: if an invoice has supplies at different rates of VAT (eg, adult’s and children’s shoes) there must be a separate digital record for each rate of VAT charged. You must split the total value of supplies on the invoice and make a separate entry in the digital records for each rate of VAT charged. This is needed to meet the requirement to have a record of outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs. There is a relaxation for mixed rate supplies at a single inclusive price (eg, meal deals).

For supplies received:

The time of supply.
The value of the supply including any VAT that is not claimable by the business.
The amount of input tax to be claimed.

If there is more than one supply on an invoice the business can record the totals from the invoice.

How can I export the full list of cash received by FSL in any given month?

You will need to export the Cash Collected CSV. The Cash Collected report can be found on EFRS from the My FSL Account menu option. Select the Cash Collected Tab and then the month you require from the drop-down list. The details of fees should be exported in CSV format. Select “Export to CSV at the bottom of the page. The cash CSV file can only be exported from EFRS for calendar months. To compile a quarterly report for your VAT return you will need to export three monthly reports.

Can Xero cope if you are a partially exempt trader? Can you make manual adjustments to deal with that?

You can set up rules in Xero to deal with partially exempt transactions if they follow a set pattern. Alternatively you would need to make manual adjustments in the software before submitting your VAT return. Manual adjustments to your accounts should only be made by your accountant as you need to understand the full impact of these entries.

If my VAT period straddles 1st April do I have to register for MTD in advance of this return?

The Making Tax Digital rules apply from your first VAT period starting on or after 1 April 2019. A ‘VAT period’ is the inclusive dates covered by your VAT Return.

Example:

A business submits a quarterly return covering the period 1 March to 31 May 2019. The business taxable turnover exceeds the VAT registration threshold and therefore the business will need to comply with Making Tax Digital rules for the period starting 1 June 2019.

A copy of the presentation slides is available from the Dean’s Secretariat or from Alterledger on request.

Advocates Making Tax Digital for VAT Questions and Answers