The Governments’ ambitious programme, Making Tax Digital (MTD), is an initiative to implement fundamental changes to the way the tax system works by becoming one of the most digitally advanced tax administrations in the world.
The original plans were to introduce a digital tax system that would require most businesses, self-employed people and landlords to use digital software to keep tax records and update HMRC on a quarterly basis.
In 2017, in response to growing pressures of Brexit and concerns of businesses and professional bodies, the Government announced a new timetable for MTD, confirming that the implementation of MTD for income tax reporting purposes would not be mandated until 2020 at the earliest. The planned implementation date for MTD for VAT would remain as 1 April 2019.
MTD for VAT
This new system will affect 2.55m VAT registered businesses with a turnover exceeding the £85,000 VAT threshold. These businesses will be required to file VAT returns through Making Tax Digital compliant software rather than the current HMRC portal. The new rules apply for VAT periods commencing on or after 1 April 2019 for most businesses. There is a deferral until October 2019 for certain VAT registered businesses such as VAT groups, overseas businesses and annual accounting scheme users.
Those who are already exempt from online filing of VAT will remain so under Making Tax Digital, and there is further provision for those who cannot adapt to the new service due to age, disability, location or religion to apply for an exemption.
There are two key requirements of MTD for VAT which are:
- To keep transaction-level records in a digital environment
- To use compatible software to submit the VAT return to HMRC
Let’s explore these two key elements in further detail:
The new regulations require businesses to record permanent data (i.e business name, address, VAT number and VAT scheme); transactional data (sales and purchases) and the VAT account in a digital format. For each sale made, the time of supply, the net value of the supply and the rate of VAT charged. Similarly for purchases made, the time of supply, the value of the supply and the total amount of input tax being claimed must be recorded. Any adjustments or corrections to the VAT account must also be recorded digitally.
If a business uses more than one product to keep digital records, it will need to digitally link them together. This link is a transfer or exchange of data between the products used to keep records. This could include linking cells in spreadsheets; emailing records to an agent; putting records on a portable device to give to an agent; importing and exporting XML and CSV files and downloading and uploading files.
During the first year of VAT mandation, HMRC has said there is a soft landing in connection with penalties for ‘digital links’, essentially giving businesses twelve months to develop these links. Therefore from April 2020, businesses will not only have to file returns digitally but also ensure that their internal and intra-VAT group systems and spreadsheets are digitally linked.
HMRC will only see the figures that are currently supplied to them in the VAT return. They will not see any of the underlying information.
Submission of the VAT return
VAT returns under MTD will need to be filed using approved software. HMRC have issued a list of software suppliers that are MTD compliant which include the market leading packages including Xero, Sage and Quickbooks. In addition there are bridging software products available for those who have not used software before. Bridging software can be used in conjunction with a spreadsheet for those businesses that do not want to change their underlying record keeping system.
Businesses will need to sign up to MTD, as HMRC will not be signing businesses up to the new service. After a business signs up to Making Tax Digital it will no longer be able to submit VAT returns to HMRC via the ‘old’ portal system, therefore it is vital to submit any non MTD VAT returns before signing up. Getting the timing right for the sign up is vital. Businesses need to be signed up at least one week before the VAT return is due. For example, a business joining for the August 2019 VAT return, should only register from around the 15 July if they pay by direct debit, or 8 July if they pay manually, and must be signed up before 30 September. To sign up to the new service you will need to know your current gateway ID and password, along with your VAT number and unique taxpayer reference (UTR). You will receive a confirmation from HMRC within 72 hours of the sign up process. You must wait for his email prior to submitting the return.
Fines and penalties
A penalty of up to £400 can be imposed if a business doesn’t file a VAT return electronically. This would include cases where the business continues to file via the ‘old’ portal system. If you can demonstrate that there is a reasonable excuse for failure to make the online return, such as IT connection problems, then no penalty will be due. In addition to a penalty, surcharges will arise if a return is both filed and paid after the due date. The key message here is to ensure that you make the correct payment on time. Under MTD for VAT, it is possible that there could be a £500 penalty if businesses fail to keep prescribed records electronically.
Awareness and communications
The government has been criticised over the promotion and communication to businesses facing these changes, as many businesses have been left unaware or unprepared for the changes. Luckily, accountancy firms like Dafferns are up to speed with the VAT programme and are already using fully compliant software.
Businesses need to ensure that they are compliant with the new rules and, if they haven’t already confirmed that their accounting system is MTD compliant, they should get help now, as MTD is only going to expand into new areas of tax.