Second phase of MTD for VAT delayed until 2021

HMRC has deferred rolling out the second phase of Making Tax Digital (MTD) for 12 months due to the coronavirus.

Phase one of MTD kicked in for VAT return periods starting on or after 1 April 2019, with what HMRC described as a soft-landing period.

This included the use of basic bridging software and waiving penalties for non-compliance throughout 2019/20, which ended on 5 April.

The second phase will demand more complex, robust technology solutions to ensure a VAT-registered business remains 100% compliant with MTD.

It will also introduce stringent rules around the way businesses digitally link their software and how they must upload their VAT returns.

Basic accounting software used during 2019/20 may lose accreditation if it lacks the required features to submit digital records of sales or purchases.

Some firms with complex systems were struggling to meet last month's deadline, before the coronavirus lockdown even started.

A spokesperson for HMRC said:

"We understand the impact of COVID-19 is creating extremely difficult times for all, and we are committed to helping in every way possible all those businesses facing unprecedented challenges. 

"Therefore, we are providing all MTD businesses with more time to put in place digital links between all parts of their functional compatible software.

"This means that all businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place."

The deferral was welcomed by the Chartered Institute of Taxation (CIOT), which recognised many businesses are working hard to simply survive.

John Cullinane, tax policy director at the CIOT, said:

"We are pleased the Government agrees this deferral of the digital links requirements can be put on ice while businesses concentrate on survival."

What is MTD phase one?

From April last year, businesses with annual taxable turnover of more than £85,000 - and some firms who opted in - started to submit digital returns.

Despite only 10% of UK-registered firms being signed up to the scheme by July 2019, 83% of businesses within the scope of MTD for VAT had joined by March 2020.

Owners were also able to use cheap and cheerful bridging software, the sort that links to the humble Excel spreadsheet, to comply.

What software is needed to comply in 2021?

Every VAT-registered firm will need to demonstrate they have digital links to the digital records they hold and file online.

These include permanent records - such as the business name and address, the unique VAT-registration number - details of any VAT accounting schemes used, plus the VAT account and transaction data.

Information on sales and purchases, including the time and value of each supply - not each invoice - needs to be recorded digitally.

It spells the end for the upload of spreadsheets or copy and pasting when the regime gets under way on 1 April 2021.

Smaller businesses that currently manage their expenses and taxes on a spreadsheet have until next spring to invest in better technology.

Only applications accredited by HMRC will be able to provide digital links between permanent electronic records.

Speak to us about Making Tax Digital.