Julie Green, a VAT expert for CronerTaxwise, who we used for tax consultancy and HMRC Fee Protection Scheme, provides some very honest and practical details relating to record keeping under the new Making Tax Digital for VAT (MTD4VAT) process.
Under MTD4VAT businesses are required to record individual supplies made and received i.e. to record individual sales and their individual purchases/expenses.
Recording petty cash transactions
Question
Petty Cash transactions: Do we have to input each entry, or can we summarise?
Answer
The initial rules were that each entry has to be input. Guidance was updated in May 2019.
On 3 May 2019, HMRC updated their VAT Notice 700/22 relating to Making Tax Digital for VAT.
They introduced section 4.3.3.2 on petty cash transactions. This sets out that HMRC will now accept that a number of petty cash transactions can be recorded as a single purchase entry in the digital records of the business, but is subject to a monetary limits.
HMRC now say that "The business can record the total value and the total input tax allowable. This applies to individual purchases with a VAT-inclusive value below £50 and the total value of petty cash transactions recorded in this way cannot exceed a VAT-inclusive value of £500 per entry."
Recording individual supplies (* see updating comments below)
Question
What about if you are paying 100 purchase invoices and you are calculating your VAT on a cash basis? Do you still need to process every one of the 100 invoices?
Answer
Businesses are required to record individual supplies made and received. Creating digital records from bank or supplier statements alone will not satisfy the MTD for VAT requirements.
Penalties for recordkeeping (* see updating comments below)
Question
HMRC presumably would not know if you didn't enter the invoices individually. Is there a penalty/view by HMRC if this is not done? We have some clients with thousands of invoices but pay the statement at the end of the month.
Answer
HMRC would pick this up during a VAT inspection. There can be record keeping penalties. However, there is a soft-landing period for 12 months [from 1 April 2019] for those who try to comply.
Recording daily cash takings
Question
Can you have a spreadsheet showing the daily cash takings, e.g. for a retail business, BUT just use a weekly/monthly total for your bookkeeping software? Do you just need the daily cash total just for an HMRC visit?
Answer
The daily gross takings must be recorded in the digital records that are sent to HMRC. If the software is used to submit the VAT returns, keeping the daily gross takings in another spreadsheet will not be permitted.
- - - - update on supplier statements and recording single amounts for batches of supplies - - - -
On 3 May 2019, HMRC updated the MTD VAT Notice 700/22, including a new paragraph 4.3.3.1. Part of this section is reproduced below.
"HMRC accepts there may be additional work for a business in capturing individual supplies digitally and this in itself could lead to data entry errors. Therefore, HMRC can accept the recording of totals from a supplier statement where all the supplies on the statement relate to the same VAT period and the total VAT charged at each rate is shown. If you choose to do this, you must also cross reference all supplies on the supplier statement to invoices received, but this can be done outside of your digital records."
In other words, you do not have to record every supply [invoice] within your digital records, but you must maintain records of all supplies behind each payment or receipt. The latter can be maintained outside of your digital records. Businesses therefore may find it helpful to record all transactions in their digital records to avoid keeping the two sets of records. Alternatively, businesses must keep a separate detailed record of all invoices behind each payment recorded in their digital records. This could be by maintaining paper supplier statements and attaching batches of the paper invoices to it.