What are the requirements?
From April 2019, you must keep certain financial records that support your VAT returns and calculations in a digital format, within software which meets HMRC criteria. Importantly, this software must be capable of exchanging information with HMRC digitally.
What is a digital record?
Contrary to popular belief, a digital record is not simply a scan or copy of a financial document such as an invoice. For MTD purposes, a digital record comprises electronic data including key information about a financial transaction. For example, for a 'sale' transaction under the MTD your data must include the time and date of the sale, the value and the rate of VAT charged.
What happens if we don't comply?
Despite delays, setbacks and confusion MTD is coming.
Ignoring MTD is not a viable strategy. The penalty regime is under review, but it is clear HMRC intend to use penalties to punish those who don't comply. Whilst a transition period and early leniency can be expected, ensuring early compliance will avoid the risks of financial penalties and unnecessary stress as MTD rolls out and expands.
What if my financial data is kept across multiple software packages?
Many businesses maintain financial data in multiple pieces of software. For example, a business may invoice from sales software, track employee expenses in a dedicated app and use cloud accounting software for everything else. Under MTD, there must be a 'digital link' between all of this software. 'Cutting and pasting' information from one software to another is specifically prohibited.
Are spreadsheets sufficient?
Many businesses continue to rely on spreadsheets to generate and manipulate financial records. The use of a spreadsheet is not prohibited by MTD, but many users will struggle with the need to maintain digital links by relying on spreadsheets alone. At best, over reliance on spreadsheets will increase costs and administration as accountants and bookkeepers step into the breach to ensure a complaint digital link exists.
If your business relies on spreadsheets, this is a good time to review your processes, plan for the future and secure the benefits of automation and cloud accounting.