A Guide to Making Tax Digital for VAT

Making Tax Digital (MTD) is the government’s scheme that makes online tax filing and payment ad digital record keeping mandatory. Whilst all types of business related tax will be included in the scheme, only Making Tax Digital for VAT has so far been given a roll-out date.

The government’s aim with MTD is to reduce tax errors and generate over £600 million in additional revenue. There are however benefits for businesses says the government, namely more straightforward record-keeping.

The MTD for VAT pilot programme is already in operation. Having started in October, it is open to any business that wishes to take part. The pilot will come to a close on 1 April 2019, at which point MTD for VAT will become mandatory for all VAT-eligible businesses, other than a minority which have had their roll-out date deferred until October 2019.

Let’s take a look at what will be involved for businesses once the official MTD for VAT roll-out date kicks in.

What do I have to do under MTD for VAT?

If you are a VAT registered business with a Taxable turnover above the VAT threshold, then you will need to keep and preserve your VAT records digitally and send your VAT returns to HMRC using MTD-compatible software.

To see what records you will need to keep digitally, take a look at VAT Notice 700/22.

When do I need to start following MTD rules?

Your start date will vary depending on your individual VAT period. You must start following MTD for VAT rules from the first day of your first VAT period that starts on or after 1 April 2019. After this date you will no longer be able to submit a paper based VAT return, or manually complete a VAT return online.

Your current VAT filing deadlines will not alter once MTD for VAT is introduced.

What should I do to prepare for MTD for VAT?

If you are not already using accounting software then you should make the switch as soon as possible. Bear in mind that by 2020, virtually all business taxes will fall under MTD rules, and without accounting software you will not be in a position to comply.

Remember that MTD for VAT is not just about online filing of VAT returns; it is also about maintaining digital VAT records.

If you are considering your options concerning accounting software, our guide to keeping your books in line should prove helpful.

If you are in any doubt as to your responsibilities concerning Making Tax Digital for VAT you should not hesitate to discuss the matter with your bookkeepers or accountant.

The Pros and Cons of Traditional Accounting

Last month we looked at what is involved in cash basis accounting. This month we are exploring the alternative: traditional accounting.

What is traditional accounting?

Traditional accounting, also known as ‘accrual’ accounting, involves recording income and expenditure at the point where an invoice was issued, or when a bill was submitted. This is opposed to cash basis accounting, where records are only made when money physically enters or leaves a business.

Who uses traditional accounting?

In practice, traditional accounting may not suit smaller businesses or sole traders. This is because invoices are recorded at the point they are issued, rather than when they are paid.

This means that you may find invoices included in your tax return figures that are yet to be paid. The risk here is that the invoice payment may take some time to come in, or may not even transpire at all. However, that invoice will still count as income for tax purposes. With cash accounting, there is no need to pay tax on anything you have not yet been paid for.

Traditional accounting tends to be more suited to the larger business, although for the smaller business expecting to grow rapidly, it is usually the better option because the turnover limit for cash accounting is £150,000.

Limited companies and limited liability partnerships must use traditional accounting.

What do I need to do if I use traditional accounting?

Traditional accounting requires you to keep records of all income and expenditure. This includes stock and equipment and its value at the end of your accounting period; all payments made to employees such as wages, benefits and bonuses; vehicle and travelling costs associated with the business; any interest accrued on bank and building society accounts, and all income.

What are the benefits of traditional accounting?

Most benefits of traditional accounting come in the form of being able to set off losses against other income, and being able to claim significantly more capital allowances. Cash accounting only allows capital allowances to be claimed against cars.

Traditional accounting, or cash accounting – which is best for your business? If you are in any way unsure as to the best accounting method for your individual circumstances, you are best advised to discuss the matter with your bookkeepers or accountant.

A Guide to Limited Company Allowable Expenses

Last month we looked at allowable expenses for self-employed workers. We pointed out that limited company rules on expenses are different and that we would look at those separately, which is precisely what we are doing in this post.

What are allowable expenses for a limited company?

The key rule to follow concerning limited company expenses is that they must be genuine. In other words, the expense must be something that was incurred exclusively, wholly and necessarily during the course of running your business.

Expenses that cross over both business and personal use cannot be claimed. It is important to retain all receipts and invoices so that if it becomes necessary, you can prove that your expenses claims were genuine.

What are typical limited company expenses that can be claimed for?

The following are some of the allowable expenses which can be set off against Corporation Tax:

Salaries – all PAYE salaries including directors and staff.

Subcontractor fees – if you engage subcontractors or freelancers to undertake work for your business then these will be classed as allowable expenses.

Pension contributions – all pension contributions paid to staff, providing they are made via an approved scheme.

Employer’s National Insurance Contributions – any contributions payable on employee salaries can be claimed for.

Travel and parking costs – travel expenses is another topic that needs its own dedicated post which we will cover in the future but suffice to say in general that most travelling costs will be classed as allowable expenses. Company car expenses can also be claimed, although there is a benefit in kind charge for private use.

Accommodation costs – if you are staying away from your normal place of business then you can claim accommodation costs, providing you do not claim for more than 24 months at a temporary place of work.

Subsistence costs – you can claim for subsistence whilst away from your normal place of work, but again as with accommodation costs, you cannot claim if you have exceeded 24 months at a temporary place of work. Incidental overnight expenses can be claimed at £5 per might or £10 per night if abroad should you be working away from home.

Training fees – providing the training delivers skills that are relevant to your business then you can claim for the costs involved.

Business insurance – all genuine business insurances such as employer’s liability, professional indemnity, property and vehicle insurance are classed as allowable expenses.

Telephone, mobile and internet fees – providing the contracts are in the name of the business you can offset the costs against your Corporation Tax. If you work from home then you can claim the cost of business calls made from your residential telephone line.

Use of home as office – home workers can claim £4 per week without receipts, or calculate a proportion of the household bills.

Computer equipment – all computer equipment and software used for business purposes can be claimed for.

Advertising and marketing costs – anything you spend on promoting your business is an allowable expense.

Business gifts – you may gift up to £50 per individual before complex rules apply.

Professional fees – anything you spend on accountants, solicitors, surveyors, etc. can be claimed for.

Health care – any employee who uses a computer is entitled to an eye test, the cost of which you can claim for. You can also claim for annual employee health checks.

It is advisable to always consult with your bookkeepers or accountant if you are unsure as to whether an expense is a genuine business one that can be included in your Corporation Tax return.