Making Tax Digital (MTD) is a government initiative that aims to make it easier for businesses and individuals to keep on top of their affairs and pay their tax right the first time. In addition, it is thought that the introduction of MTD will help businesses and other VAT registered entities to reduce accounting costs as well as errors.
VAT registered charities with a taxable turnover above the VAT threshold of £85,000 will be required to keep all their VAT records digitally from 1 April 2019. In addition, all VAT returns will need to be sent digitally, and stored on MTD-compatible software, for example Xero or Sage 50cloud. However, HMRC has deferred MTD for a small minority of VAT registered organisations that have complex needs (applies to around 3.5% of organisations). These include trusts and unincorporated not-for-profit organisations where the date to finally implement MTD will be October 2019.
The Charity Commission previously released a newsletter whereby they urged charity trustees to begin the process for preparing for MTD. One of the first steps charities should make is to identify where they can start keeping digital records. Regulations require that the following records must be kept digitally:
- 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
For larger and more complex charities, it is recommended that they should assess their internal operations and ensure that their end-to-end-process is digital. Where possible, the Charity Commission is also advising charities to join the MTD Pilot to be able to ease themselves into submitting their VAT returns digitally.
Regarding MTD-compliant software, it needs to 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
If your charity and not-for-profit currently uses multiple pieces of software to digitally keep records, you must make sure that the software packages are digitally linked. This is to ensure that information is able to flow from one accounting package to another without any requirement to manually input data.
Another important thing for charities to note is that when making exemptions and other adjustments, it is only the total of the adjustment that needs to be kept digitally as opposed to the calculations behind them. The calculation does not need to be made within the software, therefore if you make an adjustment within a spreadsheet, the information can then be transferred manually.
For charities and not-for-profits who are still getting to grips with MTD and are worried about not being ready by April 2019, HMRC has proposed a soft-landing period of 12 months where there’ll be no record-keeping penalties. This is to enable charities more time to update all their systems.
To familiarise your charity with the MTD process it is best to refer to HMRC’s website. If you are researching which kind of software to purchase, HMRC have also created a list of MTD-compliant software available.
It is also advisable to speak to an accountant who can guide you throughout the process. You can contact myself, Suda, on firstname.lastname@example.org or on 020 3146 1608.
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