HMRC have also issued new guidance on the penalties that they impose for non-compliance with the Making Tax Digital (MTD) for VAT rules. In particular, there is a penalty of up to £400 for every VAT return business file that isn’t using functional compatible software.

Functional compatible software means a software program, or set of software programs, products or applications that can:

• record and store digital records
• provide HMRC with information and VAT returns from the data held in those digital records
• receive information from HMRC

There are additional penalties if the business does not keep its records digitally. HMRC may charge the business a penalty of between £5 to £15 for every day on which the digital record-keeping requirements are not met.

To meet the digital record-keeping requirement, the business’ functional compatible software must contain:

• the business name, address, and VAT registration number
• any adjustments from calculations made outside the functional compatible software for any VAT accounting schemes used
• the VAT on goods and services supplied, meaning everything the business sold, leased, rented, or hired (supplies made)
• the VAT on goods and services received, meaning everything the business bought, leased, rented, or hired (supplies received)
• any adjustments made to a return
• the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything bought and sold
• the rate of VAT charged on goods and services
• details of any ‘reverse charge transactions,’ where the business needs to record the VAT on the sale price and the purchase price of the goods and services bought
• copies of documents that cover multiple transactions made on behalf of the business like those made by volunteers for charity fundraising, a third-party business, or employees for expenses in petty cash

All transactions must be contained in the functional compatible software there is no requirement to scan or upload supporting documents like invoices and receipts.