The MTD Guide to Digital Record Keeping

At a recent conference we learnt that HMRC believes up to 40 per cent of businesses currently submit their VAT returns through the HMRC website having made their calculations using spreadsheets or even paper formats. Any VAT registered business that continues to do this after 1 April 2019 will be considered non-compliant with Making Tax Digital for VAT.

The problem is that many business owners believe that ‘digital’ means online filing, but this is not the case. From 1 April, VAT registered businesses will need to use MTD-compatible software to submit their VAT returns. Making Tax Digital is all about keeping digital tax records.

Last month we looked at Making Tax Digital for VAT and what VAT registered businesses must do to prepare for its introduction on 1 April 2019.

In this article we will be taking a closer look at what digital record keeping actually means, and how HMRC is expecting businesses to comply with the new regime.

What is digital record keeping?

Using spreadsheets to keep track of your income and expenditure and then submitting your tax returns through HMRC’s online portal is NOT considered digital record keeping.

What is considered digital record keeping is keeping and preserving records and accounts within ‘functional compatible software’.

Whilst some software will record all the necessary VAT and accounts records, some records must still be kept and preserved in their original format for either VAT or tax purposes. An import VAT certificate (C79) for example must always be kept it its original form.

Most software allows for invoices and receipts to be scanned in to support digitally raised versions. In such cases, the original invoices and receipts do not need to be kept as all the details required for VAT purposes is preserved via the scanned document. However, if you do not scan in your supporting documents, then you must keep hard copies of them.

What is ‘functional compatible software’?

Any software, product or application that is able to record and preserve digital records; that can provide information and returns to HMRC using data held in its digital records and that can receive information from HMRC is considered functional compatible software, providing it can carry out ALL of these tasks.

If you use a system that only carries out some of these tasks, but you use a further program or platform to complete the necessary function, then this will be considered acceptable. You do not have to hold the complete set of digital records in a single place or program.

If you are already using online accounting software and are unsure as to whether your system will be MTD compatible, take a look at this list compiled by HMRC. The list shows all the software providers that are currently compliant, together with further providers with MTD compatible products in development.

If you use a bookkeeper, accountant or other tax agent to submit your tax returns and either email them your spreadsheet or provide them with a portable device containing your digital records so that they can import the data into their software ready to calculate and submit your return, then this is considered acceptable.

How can we help you?

Xero, our preferred online accounting software, is MTD compliant, which means we are ready to ensure all our bookkeeping clients are compliant from 1 April 2019.

As Xero Silver Partners we are able to offer you extended expertise in this software.

To learn more about how we can assist you with Making Tax Digital compliance, please get in touch.

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