Making Tax Digital (MTD) for VAT was introduced for all UK businesses making annual taxable supplies of more than £85,000 for VAT periods beginning on or after 1 April 2019.
A controversial policy of HMRC has always been that a business using, for example, the cash accounting scheme and spreadsheets to digitally record their expenses had to record every single purchase invoice in a digital format, even though the business might make a single payment to a supplier based on a statement covering perhaps 40 or 50 different invoices.
It would be sensible for the business to just make a one-line entry on the spreadsheet based on the payment total. With the cash accounting scheme, input tax is only claimed when payments are made to suppliers. That policy has now changed.
Updated public notice
VAT Notice 700/22 has been updated a number of times this year as HMRC’s policy on MTD has evolved but the latest update on 5 May 2019 is very welcome because it means that supplier statements can now be used to record expenses for input tax purposes – a big time saving for many businesses that adopt spreadsheet accounting.
However, if the statement comprises invoices at more than one rate of VAT, the individual totals relevant to each VAT rate within the payment must be recorded separately.
Gary the decorator buys all of his paint from ABC Paint (standard rated). He also buys decorating manuals from the same supplier (zero rated). In April 2019, the supplier statement showed a total payment due of £1,300, consisting of £100 of manuals and £1,200 of paint.
Gary is VAT registered and uses the cash accounting scheme and he records his expenses on a spreadsheet, which tracks the entries on his bank statements (he does not deal in cash). Following HMRC’s change of policy, he can make a digitally accounting entry as follows:
- Paint £1,000
- Manuals £100
- VAT £200
- Total payment £1,300
Petty cash expenses
The updated notice has also confirmed that petty cash expenses can be posted as a single total, as long as no individual receipt within the posting exceeds £50 and the total of all receipts does not exceed £500 per entry. Both figures are VAT inclusive.
This approach with petty cash expenses is fine because there is a clause in the legislation which says that MTD accounting is not necessary where it is ‘impossible, impractical or unduly onerous’. This definition perfectly fits petty cash expenses. And, in reality, HMRC rarely shows an interest in petty cash expenses – officers are much more interested in, say, fixed asset additions or land and property transactions.