Are you VAT registered and using the cash accounting scheme? Do you use a manual cashbook and are a little concerned that you can't continue to use your cashbook system with a spreadsheet and comply with Making Tax Digital Guidelines?

Bringing your business into line with the new Making Tax Digital guidelines can feel quite daunting. If you're not used to using an electronic accounting system on a day to day basis, then you may be concerned about switching to a digital system and whether you can also use those tried and trusted spreadsheets.

You can read about the guidelines and the implications direct here on the government site, and here's some more information to help make it a little clearer. Essentially the guideline states that for both supplies made and supplies received a digital record should be kept of:

  • the time of supply – the tax point;
  • the value of the supply – the net value excluding VAT, and
  • the rate of VAT charged for sales or the amount of input tax that you will claim for purchases.

To clarify, the time of supply, if you are cash accounting, is the date you receive payment or pay for the supply.

More importantly, what is not made entirely clear on the government notice is that the records don't just need to be digital, they also need to cross-reference to payments and receipts, which can indeed be done in the cashbook and effectively the cash book will become your digital record.

Businesses using the cash accounting system have always been required to cross-reference entries to their corresponding sales and purchase invoices so this isn't particularly new and MTD has not changed this. Simply recording a payment which covers several invoices, or part-pays a single invoice is not enough. The cross-referencing and date is important too.

You also need to be aware that statements from your suppliers that show multiple transactions cannot be posted as one entry. All invoices must be recorded individually and, as usual, retained for input tax deduction. There is one exception, which is described in the notice 700/22 and applies to HMRC’s definition of third-party agents: “where the information is received as a summary document you can treat this document as one invoice received by you for the purpose of creating your digital record”.

In most cases, Making Tax Digital should not change the type of records you need to keep but does require those records to be entered in digital format. The advantage of Making Tax Digital is that record keeping should be a little easier in the long run, especially as more of your suppliers will communicate with you digitally, hopefully keeping paper filing to a minimum.

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