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.
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.
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.
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
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.
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 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:
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.
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:
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.
Show the total value of all your business sales and other specific outputs but leave out any VAT. Some examples are:
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.
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:
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:
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).
If there is more than one supply on an invoice the business can record the totals from the invoice.
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.
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.
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.
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.
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