The rules on Making Tax Digital for VAT (‘MTD’) are currently mandatory for suppliers. including local authorities, which are registered for VAT and where the value of taxable supplies in a year exceeds the VAT threshold (currently £85,000). The Government has announced that MTD will become mandatory for all suppliers registered for VAT, whatever the level of their taxable supplies, as from 1 April 2022. Suppliers will need ‘compatible’ software or, if they currently prepare their VAT returns using a spreadsheet, ‘bridging’ software. All the accounting packages commonly used by local councils are ‘compatible’ although you may have to pay for an upgrade.
Councils registered for VAT can sign up for MTD at any time and do not have to wait until 2022.
MTD only applies to councils which are registered for VAT because they make taxable supplies such as charging for off-street parking, running retail outlets such as tourist information centres, charging for events, charging for ‘sports facilities’ or hiring out buildings or rooms in buildings where there is an ‘option to tax’ in effect. Councils not registered for VAT (i.e. they reclaim VAT on non-business activities and ‘exempt supplies’ on Form VAT126 under the special rules for local authorities) are not affected.
The Government has also made an announcement on Making Tax Digital for Income Tax. Local councils do not pay income tax and so this announcement does not affect them.