It is three months since the announcement which put VAT firmly at the forefront of the Making Tax Digital (MTD) programme. Our post in July outlined the challenges faced by businesses, advisers and HMRC. This post is an update on recent developments.
The present position
To summarise, it was announced that Making Tax Digital for VAT will come into effect from April 2019. From that date, businesses with a turnover above the VAT threshold (currently £85,000) will have to:
- keep their records digitally (for VAT purposes only), and
- provide their 9 box VAT return information to HM Revenue and Customs (HMRC) via Making Tax Digital (MTD) ‘functional compatible software’- not by manually inputting figures onto HMRC ‘s portal.
The smallest businesses will not be required to use the system, although they can choose to do so voluntarily.
Since then HMRC has published Making Tax Digital for VAT: legislation overview the aim of which was to provide an overview of the proposed legislation. Provisions in Finance Bill (No. 2) 2017 will give HMRC the powers to introduce regulations, which will set out the detailed requirements that businesses will have to meet. See the HMRC information here.
Businesses mandated into MTD for VAT will need to keep digital records and submit VAT returns directly from software from 1 April 2019. To achieve that timeframe, HMRC are working to a ‘roadmap’, the key elements of which are:
- Autumn 2017 – publish draft Regulations for consultation
- Autumn – winter 2017 – 2018 – private beta testing of software commences.
- Spring 2018 – Regulations laid before Parliament
- Spring 2018 – public beta testing of software
- 1 April 2019 – MTD commences – first VAT return period commencing on or after 1 April 2019.
What does this mean?
- All prime records must be kept in electronic format, this includes any adjustments made.
- Each step in the accounting process, after inputting source data, must be digitally not manually managed. In other words, after inputting invoices, journals etc., software programs must sort and consolidate data right the way through to uploading the VAT return totals to HMRC. Data transfer between digital accounting records and any excel spreadsheets used must be via electronic links
- Functional compatible software will be needed to communicate between digital records and HMRC. HMRC will not provide this software, but instead we understand software companies are working with HMRC to update their accounting packages or provide stand-alone linking tools.
- HMRC will be able to digitally examine the 9-box VAT return data as it reaches their systems, but it will not be able to access your underlying data. HMRC will encourage taxpayers to voluntarily provide some additional information to aid better understanding of their VAT position.
- In time, HMRC will sense-check the data it receives at the point of submission. This may prompt questions or a request for further data if there appears to be any inconsistency with previous information.
- HMRC will be piloting the changes from Spring 2018 (see timetable above) and is keen to ensure a wide range of different organisations, including charities, take part in that pilot to ensure everything is thoroughly tested ahead of April 2019.
- Once a business is required to keep digital records, this requirement remains in place even if turnover falls below the VAT threshold and the business remains registered for VAT – in other words, once a business is in MTD, it stays in.
We became aware of mixed messages from HMRC officials as to the scope of the MTD exemption for charities, and sought clarification. We can now confirm that MTD will apply for VAT from April 2019 for charities and their subsidiaries (subject to the exemption for all separately registered businesses whose taxable supplies are below the VAT registration threshold of £85k). For VAT, the only exemptions that will apply are those which already apply to the mandatory submission of electronic VAT returns. No other exemptions are currently proposed.
MTD for corporation tax has been deferred to an undetermined future date. HMRC will formally consult on the policy design before implementing any changes. Subject to this, when introduced, charities will be exempt (as they are not subject to CT), but their subsidiaries will we understand have to comply with MTD for corporation tax.
More detail and what to do now
Many businsses use spreadsheets to carry out adjustments to VAT that current off-the-shelf accounting software does not provide for – such as partial exemption annual adjustments and capital goods scheme adjustments.
We understand HMRC have recently confirmed that it is only the submission of the VAT return figures that will need to be made via API-enabled software, either from the record keeping software package, or an API-enabled spreadsheet. However, the export of figures from software into spreadsheets (to calculate adjustments etc) will not be required to be performed electronically. A manual transfer of data in and out of the MTD compatible software is acceptable. HMRC explain that, ideally, automated transfer of data would take place, but that will be a ‘nice to have’ NOT a requirement (at this stage). We undertand HMRC and software companies are currently working on this above to identify / develop what is achievable.
Our firm has contributed to a more detailed analsyis of this and other MTD issues for businesses which has been compiled by the Chartered Institute of Tax and is available here. We recommend you begin communicating with your software package supplier or accountant to understand how they envisage MTD will affect your current VAT reporting, including any use of spreadsheets. We think this will be especially important for all partly exempt businesses and those with complex VAT recovery methods.