What is Making Tax Digital for VAT?
Now the 31st January tax deadline is behind us, we’re turning our attention to the year ahead. One of the key milestones in the coming months will be the implementation of the first part of HMRC’s Making Tax Digital initiative, Making Tax Digital for VAT. You’ve more than likely seen and heard the adverts referring to it, but what does it mean for your business in practical terms?
Making Tax Digital (or MTD) is wider than just VAT and is focussed both on making it easier for people and businesses to keep on top of their taxes and on reducing the difference between what taxes should be paid and what is being paid (the “tax gap”). For example, the estimated VAT tax gap for 2016/17 was 8.9% and that for self-assessment was 16.4%: we’re not talking small sums of money! By making the process digital, it’s considered that there’ll be fewer errors and the whole process should be easier and faster, in theory a win-win for both HMRC and businesses.
Future MTD requirements will include income tax and corporation tax, but these won’t be mandatory until at least April 2020, although HMRC currently has a voluntary pilot running for MTD for Income Tax.
The first key point is that the new MTD requirements currently only apply to VAT registered businesses with a taxable turnover over the VAT registration threshold of £85,000: if you’re voluntarily VAT registered with a taxable turnover below £85,000 then you’re not required to sign up for MTD, although you can do so voluntarily (and may wish to do so, especially if you’re close to the threshold). The requirements apply to all types of businesses, there’s no difference whether you operate as a partnership, a sole trader or a limited company.
If you’re VAT registered and have a taxable turnover of £85,000 or more then, (apart from a few exceptions) you’ll need to comply with the new requirements from the start of your first VAT quarter commencing on or after 1st April 2019.
Some complex businesses, such as those with VAT groups and trusts, won’t be required to comply until the start of their first VAT quarter commencing on or after 1st October 2019. The list of organisations affected is very specific and limited and most businesses will fall under the 1st April 2019 implementation date.
There are a few situations where businesses can apply for exemption from MTD for VAT, but HMRC will need to agree these on a case by case basis:
- Businesses run entirely by people whose religious beliefs prevent them from using computers,
- Where it isn’t reasonably practical to keep records or submit VAT returns digitally, e.g. due to age, disability or remote location,
- You’re subject to an insolvency procedure.
What Do I Have to Do?
In essence, you’ll need to keep certain accounting records digitally within “functional compatible software” (most of the standard accounting packages will meet the requirements) and submit your VAT return directly from API enabled software. You’ll no longer be able to do your calculations manually and type the figures into the HMRC web portal.
The records that you’ll need to keep electronically include:
Designatory (permanent) data:
- Your business name
- Your principal place of business address
- Your VAT registration number
- Which VAT accounting schemes you use
Supplies made (products / services sold and included on your VAT return):
- Date of supply (tax point)
- Net value excluding VAT
- Rate of VAT charged
Supplies received (your purchases included on your VAT return):
- Date of supply (tax point)
- Net value excluding VAT
- Amount of VAT to be reclaimed
If your software doesn’t record reverse charge transactions (EU purchases), you’ll need to enter them separately as a sale and a purchase.
Your software must also contain certain summary totals for each VAT return, separating out UK and EU sales and purchases and recording any adjustments made.
Where a software package doesn’t fully comply with HMRC’s record keeping requirements, it can be used with other software set up so that the programmes communicate with each other electronically using digital links. This electronic communication must not include copying and pasting data or otherwise manually transposing data between software. For example, acceptable digital links can include emailing a spreadsheet or giving a memory stick with data on to your accountant or bookkeeper to import into their software to do a calculation, as well as automated data transfer. HMRC are allowing a 12 month period for businesses to get digital links in place (the so-called soft landing period), so some cutting and pasting or similar between software packages will be allowed up until the start of your first VAT quarter commencing on or after 1st April 2020. Within this soft landing period, HMRC won’t charge penalties for MTD issues, but will still apply other VAT related penalties.
Ideally, you’ll be able to submit your VAT returns directly from your accounting software. However, where this isn’t possible, you can use bridging software, including API enabled spreadsheets.
If you’re using a VAT scheme other than the traditional VAT scheme, e.g. Flat Rate VAT or a Margin scheme, the requirements and processes may be a little different, so we’d strongly suggest seeking specific guidance.
It’s vital to be prepared well in advance of the implementation deadline. Talk to your accountant and / or bookkeeper – they’ll be able to advise you on how and if MTD for VAT will affect you. However, if you maintain your own accounts and submit your VAT returns yourself, the key actions to consider are:
- If you’re not already using MTD compatible software, research and select a suitable package. HMRC maintain a list of compliant software at https://www.gov.uk/guidance/software-for-sending-income-tax-updates#VAT . You’ll need to have this set up and in full use from the start of your first VAT quarter that commences on or after 1st April 2019 at the absolute latest. Don’t forget to allow time to transition as you’ll need to set up opening balances and other information in advance.
- You can sign up with HMRC to file your VAT returns using software in advance of the compulsory start date at https://www.gov.uk/guidance/use-software-to-submit-your-vat-returns. HOWEVER, don’t do this until you’re fully ready to start filing your VAT returns using your software as once you’ve signed up, you won’t be able to change back to submitting them by typing figures into the HMRC portal.
If you have any questions or comments around MTD for VAT, we’d love to hear from you. We appreciate that there’s a lot of information available and it would be impossible to cover every scenario within this blog!
If you’d like to do some further research or reading, we’d recommend the following:
- Overview of Making Tax Digital: https://www.gov.uk/government/publications/making-tax-digital/overview-of-making-tax-digital
- VAT Notice 700/22: Making Tax Digital for VAT (this contains lots of detail): https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat
- Help and support for Making Tax Digital https://www.gov.uk/guidance/help-and-support-for-making-tax-digital