VAT is Changing: Making Tax Digital for VAT

“HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world”. With the intention of increasing effectiveness and efficiency, ultimately, to make it easier to get tax right, Making Tax Digital (MTD) fundamentally changes the way the tax system works. VAT is at the forefront of MTD and accordingly, in October 2018, HMRC launched its MTD pilot for businesses with more straightforward VAT affairs and also published a list of commercially available MTD software. This newsletter seeks to provide a brief overview of the constituent aspects of MTD for VAT.

What is Making Tax Digital for VAT?

From April 2019, all VAT registered businesses with a taxable turnover above the VAT threshold (currently £85,000) will be required to keep digital records and file their VAT returns using “functional compatible software”. It is therefore important to continually monitor turnover to determine whether compliance with MTD for VAT is required. Where a business is required to comply with MTD for VAT, those obligations continue even when the taxable turnover falls below the VAT threshold. VAT registered businesses with a turnover below the VAT threshold can opt into MTD, however there is no obligation to do so.

Importantly, MTD for VAT will not change the amount of information required for submission to HMRC (although there will be scope for providing additional information through voluntary updates and supplementary data), nor will it change the current VAT filing and payment deadlines.

Whilst most VAT registered businesses will be required to comply with MTD for VAT from April 2019, a six-month deferral will apply to VAT registered businesses, which are regarded as having “complex VAT affairs”. Accordingly, VAT registered businesses which fall into the following categories, will only be obligated to use MTD for VAT from 1 October 2019:

• Trusts
• Not for profit organisations that are not companies (including some charities)
• Businesses / Organisations with the following VAT profile:
  • VAT Group registration
  • Divisional VAT registration
  • Those required to make payments on account
  • Those who use the annual accounting scheme
• Public sector entities (including Government Departments and NHS Trusts)
• Public Corporations
• Local Authorities
• Traders based overseas

In due course, HMRC will send an individual formal legal notice to VAT registered businesses which fall into the above categories, advising them of the deferral and detailing their start date for MTD for VAT.

Eventually MTD for VAT may be extended to all VAT registered businesses and organisations, although this may not happen until April 2020.

Exemptions to Making Tax Digital for VAT

In addition to VAT registered businesses with a turnover below the VAT threshold, the rules will not apply to those subject to an insolvency procedure. The rules will also not apply to those who do not use computers for religious reasons and those for whom HMRC are satisfied it is not reasonably practicable to require compliance for reasons of disability, age, remoteness of location or any other reason.

The exemptions may be applicable even to those who are not currently exempt from online filing for VAT. Where exemptions may apply, the matter should be raised with HMRC through the VAT helpline to discuss and put in place alternative arrangements (where exemptions are not appropriate, digital assistance may be available to help provide online support). Those exempt from MTD for VAT may opt to comply with the rules, although this will require prior notification to HMRC (similar notification will be required in the event of withdrawal from MTD for VAT).

Digital Record Keeping

All VAT registered businesses must keep and preserve certain records and accounts. Although businesses will not have to scan and store all invoices and receipts digitally, each individual transaction will need to be recorded and stored digitally. Thus, the following records must be kept digitally:

• Designatory Data:
  • The name of the business or organisation.
  • The address of the principle place of business.
  • The VAT registration number.
  • Details of any VAT accounting schemes used.
• For Supplies Made:
  • The time of the supply.
  • The value of the supply.
  • The rate of VAT charged.
• For Supplies Received:
  • The time of the supply.
  • The value of the supply (including any VAT that cannot be claimed back).
  • The amount of input tax to be claimed.
• VAT Account:
  • The output tax due on sales.
  • The tax due on acquisitions from other EU member states.
  • The tax due on behalf of its suppliers under the “reverse charge” procedure.
  • The total input tax claimable on business purchases.
  • The total input tax allowable on acquisitions from other EU member states.
  • The tax to be paid or reclaimed following a correction or error adjustment.
  • Any other adjustment required by the VAT rules.

Nonetheless, despite the requirements of MTD for VAT, legally there are some records that must be kept and preserved in the original form for VAT and tax purposes (for example, C79 import VAT certificate).

Functional Compatible Software and Digital Links

HMRC has defined functional compatible software as a software program or set of programs which must:

• Record and preserve digital records.
• Provide to HMRC information and returns from data held in those digital records by using the Application Programming Interface (API) platform.
• Receive information from HMRC via the API platform.

HMRC has published information on MTD for VAT compatible software (together with software currently under development). Inevitably, because the relevant software is being developed by third party software developers, it is unlikely that such MTD for VAT compliant software will be available without any cost.

Although some software products will perform all the functions listed above, there is no requirement to hold the digital records on a single software product. Therefore, it is possible to record and preserve digital records on a spreadsheet, provided the spreadsheet is API enabled or is used in conjunction with MTD compatible software which perform the other functions.

If digital records are maintained on multiple software programs, products or applications, “digital links” (the electronic transfer or exchange of data between software programs, products or applications) will need to be established. Digital links are intended to create a “digital journey”, wherein there is no manual intervention or transposition of data. HMRC has indicated in a non-exhaustive link that emailing a spreadsheet containing digital records to a tax agent, so the agent can import the data onto their software to carry out a calculation amounts to a digital link. Similarly, transferring records onto a portable device and automated data transfers are deemed as digital links. As such, “cutting and pasting” data would not constitute a digital link.

Businesses may authorise agents to keep and maintain digital records on their behalf and, such agents may engage with HMRC for the purposes of sending and receiving data. Agents who are already authorised to act for clients in VAT matters will not require re-authorisation for MTD for VAT. However, the agent must have their own or the businesses’ software which holds the digital records.

HMRC will allow businesses a period of time (known as “the soft landing period” – 1 April 2019 to 31 March 2020) to establish digital links across all parts of their functional compatible software. During this period, HMRC will permit businesses to manually transfer and exchange data (including cutting and pasting data).

Conclusion

Effectively, MTD for VAT introduces a requirement to hold all VAT return data digitally and such data must be digitally linked, so that individual transactions can be traced from the original data, through to the completed VAT return. It will also create a further interface of communication for VAT registered businesses and HMRC.

HMRC have, over the years, been on the road to collecting as much data as possible. MTD for VAT is clearly one further mechanism by which source data will soon be collected and perhaps analysed by HMRC. The result of this could be that we see a reduction in aspect reviews conducted by HMRC as the source data (albeit not necessarily original invoices/ receipts) will already be available to HMRC with each VAT return submitted.

This may result in a cost saving for HMRC and VAT registered businesses alike, however the saving will come at the price of significant information having to be provided to HMRC. We should point out that this is just the start of MTD and it will not be without complication. After MTD for VAT, HMRC will no doubt turn their attention to other areas such as income tax and corporation tax.

Following this brief overview, in next week’s newsletter we will take a closer look at some of the challenges and problems with MTD for VAT, together with some advice on preparing your business for MTD.