A client is compulsorily VAT registered and is using the cash accounting scheme. Their current system is not particularly sophisticated. They only use a manual cashbook. They wish to ensure that they are MTD compliant, but want to keep things as simple as possible. Can they continue to use their ‘old style’ paper-based cashbook but now do this though a spreadsheet based cashbook and submit via bridging software?
Generally, the answer will be yes. However, individual ‘supplies’ must be recorded separately.
A digital record of purchases and sales invoices, cross-referenced to the payments and receipts, should be shown in the cashbook and effectively the cash book will then become the client’s digital record.
This is not a new requirement as businesses using cash accounting have always been required to cross-reference cashbook entries to the corresponding sales and purchase invoices (paragraph 4.3 Notice 731 Cash Accounting). MTD has not changed this.
In theory, MTD should not change what type of records you need to retain. However, it will require those records to be maintained in a digital format. It could even be argued MTD may expose previous record-keeping deficiencies!
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Simply recording a payment which covers several invoices, or part-pays a single invoice, is not enough (*). This is because the entries must be cross-referenced, within the cash book, to the individual invoices and not recorded as a single batched receipt or payment.
Therefore, supplier statements detailing multiple transactions cannot be entered as a single entry. Purchase invoices must be recorded individually and retained for input VAT deduction.
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On 3 May 2019, HMRC updated the MTD VAT Notice 700/22, including a new paragraph 18.104.22.168. This section is reproduced below.
Some businesses record the value of each supply from a supplier statement instead of individual invoices. This may occur particularly where a business receives a large number of invoices from the same source. In HMRC’s view, it is best practice to record digitally the individual supplies as this means less risk of invoices either being missed completely or being entered twice - once as an invoice, and once as part of the statement. There is also less risk of the wrong rate of VAT being applied.
On the other hand, 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.