VAT is being ‘made digital’ this year and HMRC plans to give income tax and corporation tax the same treatment in the future. But what does it mean to make a tax digital?
Payroll is digital already. Real Time Information (RTI) requires employers to file many data items about every payment to every employee, including totals of various items for the year to date. There are over 100 items that can be included for each payslip, although most of them are not always required. The RTI return must be filed promptly each time any employees are paid. The only practical way to do this is to store all of the payroll records on a computer system. Keeping the records digitally became a practical necessity as a consequence of the RTI filing rules. In theory, employers can still keep their payroll records on paper and then, every pay day, work out the totals and type them into a computer to file their RTI return, but this would be very time consuming and error-prone.
The approach to Making Tax Digital for VAT is quite different because a VAT return is far simpler than an RTI return. Aside from basic information, such as the VAT number and period, the VAT return only contains nine numbers which summarise what the business did over the previous three months. For small businesses, it is still practical to calculate these figures manually, or to calculate them on a spreadsheet and retype them onto the VAT return. However, from next month, HMRC requires records of VAT transactions to be kept digitally, i.e. on a computer system. Moreover, if the nine numbers of the VAT return are to be filed from a different computer system, HMRC requires the information to be transferred via a ‘digital link’, which essentially bans you from retyping it. These rules don’t apply to every firm – they are for businesses with a taxable turnover above the VAT threshold, and there are some exceptions.
So, does Making Tax Digital for VAT require you to change your payroll software? The answer, in short, is no. Wages and other payroll transactions aren’t subject to VAT, so they don’t fall within the scope of Making Tax Digital for VAT. The Payroll Site has digital links with many of the popular accounting systems, so you can transfer your payroll figures digitally if you choose.