More information from HMRC on Making Tax Digital

On 13 July 2018 HMRC published further information on Making Tax Digital (MTD) for businesses and agents in the run up to the start of the mandatory MTD VAT service from 1 April 2019.

From April 2019 all VAT registered businesses (including charities) with a taxable turnover above the VAT threshold (£85,000) are required to keep their VAT business records digitally and send their VAT returns using Making Tax Digital (MTD) compatible software. Businesses with a taxable turnover below the VAT threshold will not have to operate MTD, but can still choose to do so voluntarily.  A reminder of key principles behind MTD for VAT can be found in our previous article here.

The information includes:

  • A new HMRC VAT Notice. The VAT Notice 700/22  gives guidance on the digital record keeping and return requirements of MTD for VAT including:
    • Who needs to follow the MTD rules and from when;
    • The digital records businesses must keep, and a series of HMRC directions that relax these requirements in certain circumstances (such as where a mixed rate supply is made, where a third party agent makes or receives supplies on behalf of a business, and where a business uses a special VAT scheme such as a retail scheme or the Flat Rate Scheme);
    • How businesses must use software to keep digital records and file their returns from those digital records, including information on when programs do and do not need to be digitally linked in situations where a combination of software programs is used.
    • A number of illustrated examples to show customers how to ensure their specific set-up will be compliant with the regulations from April 2019
  • A page on GOV.UK providing a list of software developers  HMRC is currently working with that have already demonstrated a prototype of their product ready to start testing with businesses and/or agents. Over 35 of these have said they’ll have software ready during the first phase of the VAT pilot in which HMRC is testing the service with small numbers of invited businesses and agents. The pilot will be opened up to allow more businesses and agents to join later this year.
  • A communications pack to provide stakeholders with information to support businesses and agents to prepare for MTD.

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Making Tax Digital for VAT – under a year away

We are less than a year (or only 4 VAT returns to go) before the ‘Making Tax Digital’ deadline of 1 April 2019.

The first stage of Making Tax Digital (MTD) will apply to all VAT registered businesses who are over the VAT turnover threshold (£85,000 until March 2020) from the first VAT return which starts after 1 April 2019. The regulations passed into law in March 2018. HMRC have published an Explanatory Note, a draft VAT Notice and a draft Addendum document outlining ‘user journeys’, which uses diagrams to explain the digital links required between records. These can be accessed here but are subject to future amendment. A detailed chart which compares the current rules with those expected under MTD for VAT can be found on the CIOT website here and we reccommend reading this.

The regulations provide that VAT registered businesses (including charities) must keep an electronic account of information specified in the amended regulations, and must use an approved form of software to prepare and render VAT returns. Under MTD, businesses must keep certain mandatory records in a digital format within ‘functional compatible software’, able to interface with HMRC’s systems, and thus send and receive information to and from HMRC. Taxpayers using multiple accounting software packages to record or calculate information that drives VAT return data must digitally link them to be MTD compliant.

Most of our clients use software to keep their accounting records. However, we are aware that very few of them actually use that software to calculate and declare VAT returns, due to the complexities of partial exemption and business/non-business adjustments. If you are using spreadsheets for that you need to start thinking about how any adjustments calculated via spreadsheet are going to get back into a digital format for submission to HMRC under MTD. At the very least we recommend contacting your software supplier to check whether they will be providing any support, and looking at the ‘user journey’ Addendum document from HMRC. You may need to upgrade to use ‘cloud’ based accounting software.

The main and important issue is that information transfer between internal interfaces and with HMRC must be ‘digital’ (and via third party software) where the records are part of the Making Tax Digital for Business (MTDfB) journey, but adjustments (such as partial exemption) will still apparently be able to be calculated separately and manually via spreadsheet– i.e. this step is not part of the ‘MTDfB journey’. It is noted that the information to be recorded also includes a requirement to separately identify the value of income into standard rated, reduced rated, zero-rated, exempt or outside the scope outputs. HMRC plans a “soft landing” in the first year to allow organisations to transition to the new rules.

The draft regulations provide for exemptions from the digital requirements based on turnover, inability to use electronic systems for religious or practical reasons, and for businesses subject to insolvency. Exempted businesses may opt for the obligations in the regulations to apply to them if they so wish. The amended regulations also provide rules for how business records should be preserved.

Pilot scheme

Businesses can sign up to take part in a MTD pilot exercise from 1 April 2018. The benefit of taking part in the pilot will be being ahead of the game, getting access to support, being kept up to date on how the system is developing, an opportunity to influence the look and feel of the final version, and feedback on how you are getting on with the submissions. There is more information on the pilot here, but please contact us if you need more help.

 

The VAT registration limit – up or down?

Since the publication of the Office of Tax Simplification’s report earlier this month there has been a lot of speculation as to what the Chancellor might do about the VAT registration threshold in this week’s budget.

The suggestion has been that the threshold could be dropped to around the higher tax rate limit of c£43,000, or even to the national average wage, i.e. £26,000 a year, but at the moment we don’t know for certain if the government will implement this, or when it could happen. The average threshold in Europe is around £20k. The idea of lowering the threshold, especially to the lower of those two options, has been met with a lot of anger in the small business community.

What are the issues?

Well, there is a lot of evidence that the current £85k limit is a barrier to growth. This is because the limit causes a ‘cliff edge’ effect where a small business approaching the limit needs a lot more turnover to compensate for suddenly having to add 20% to all its income. So many businesses decide to ensure they stay just short of the threshold by various means, for example by closing for a month each year. That causes ‘bunching’ of business around the threshold and prevents business expansion that might lead to job creation.  Plus, some businesses split themselves artificially into separate operations simply to avoid the limit (“disaggregation”) – with a lower limit there will be much less incentive to do this.

Who might be affected?

On the other hand, lowering the limit substantially would affect hundreds of thousands of self-employed small business owners such as plumbers, gardeners, decorators and similar, who are not planning any whizzy entrepreneurial growth but who are just making a living outside of traditional employment. These businesses already have limited income and will be affected by having to add 20% to their charges – and will have very few costs to offset as input tax. Their customers will be members of the public with no ability to deduct the VAT.

There will be a number of hurdles: –

  • The UK has had a high threshold for a long time and HMRC has not to date had to deal with thousands of small businesses;
  • HMRC guidance has been criticised in the OTS report – it will need to be helpful to a lot of businesses new to VAT;
  • If the lower threshold also brings businesses into Making Tax Digital that will be a big change on top of the requirement to register;
  • The biggest impact will be on businesses which deal direct with the public;
  • For small charities the effect could be very difficult unless the Government also raises the de minimis limit for exempt  activities;
  • Prices will go up, with a possible effect on sales – some businesses may fold.

The OTS suggested some ways in which these effects could be lessened. There could be for example a lower rate for labour intensive service businesses or a change to the VAT Flat Rates, or a tapering requirement to register (though that might make things more complex, not simpler).

We can only guess what is coming. But the in the context of recent press reports on how far richer people seem to be engaged in various off-shore tax planning schemes to avoid paying VAT, the political backlash might not be “Paradise” for the Chancellor.

 

A new timetable for Making Tax Digital – VAT to the fore

On 13 July 2017, the UK Government announced major changes to the timeline for the implementation of Making Tax Digital (MTD). Under the new timetable:

  • only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes. They will only need to do so from 2019.
  • the smallest businesses will not be required to use the system, although they can choose to do so voluntarily.
  • for taxes other than VAT businesses will not be asked to keep digital records, or to update HMRC quarterly, until at least 2020.

Proposals will be put in place when changes are brought forward as part of the Finance Bill, expected to be published soon after the Parliamentary Summer recess. HMRC have provided updated information here.

Significant changes to VAT reporting

Record keeping and quarterly reporting for MTD purposes will be significantly different from current VAT record keeping and quarterly reporting. Although the majority of VAT registered businesses report their VAT figures online, this is only via manual input of final figures onto HMRC’s VAT Online system. MTD will require businesses to use accounting software that can link directly to HMRC’s systems. Businesses will no longer be able to keep manual records.  As the use of spreadsheets in VAT accounting is commonplace, (typically to correct the output from accounting software and to operate partial exemption and other VAT schemes), these challenges should not be underestimated.

Timing

MTD for VAT is expected to take place at the same time as the UK leaves the EU (April 2019). Uncertainty around the VAT treatment of transactions between the UK and EU will inevitably arise, and businesses will need to both understand the tax-technical changes to the rules, and ensure that their accounting systems deal with such transactions correctly.