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.
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.