Making tax digital: A taxing new process
It’s vital that practitioners get their heads around the pain points that MTD conversion will bring for clients – and communicate to them as smooth a path as possible.
Practitioners will be aware that all businesses with UK taxable supplies in excess of £85,000 per annum will be required to adopt MTD for VAT purposes with effect from 1 April 2019. This means UK-based businesses that are compulsorily UK VAT registrable plus any non-UK-based businesses that are both compulsorily registrable (as Non-Established Taxable Persons/NETPs) and have a UK taxable turnover in excess of £85k per annum will have to ensure their systems comply with MTD.
‘UK taxable supplies’ means all income that has a UK place of supply and is subject to UK VAT at the zero, reduced or standard rate of UK VAT. It also includes ‘deemed’ supplies, for example where a UK business receives services from overseas that would have attracted VAT if bought from a UK supplier (commonly referred to as reverse charge services).
If a business that was compulsorily registrable in the past is now below the threshold but has chosen to stay VAT registered, it will not be required to implement MTD unless/until its UK taxable turnover exceeds £85k on or after the MTD go-live date of 1 April 2019.
MTD has been deferred by six months until 1 October 2019 for certain businesses with more complex VAT accounting needs. These are: trusts; ‘not for profit’ organisations that are not set up as a company; VAT divisions; VAT groups; public sector entities required to provide additional information on their VAT return (government departments, NHS trusts); local authorities; public corporations; businesses based overseas (non-established taxable persons); and those required to make payments on account and annual accounting scheme users.
All other businesses required to implement MTD will need to be ready for their first VAT return period starting on or after 1 April 2019.
While all VAT records must be stored digitally, VAT records in the context of MTD do not include invoices, stock books, transport documents or even the required calculations such as partial exemption, capital goods scheme, apportionments, blocked input tax recovery, and so on. What is required is the tax point, the net amount and the rate of VAT for each purchase and each sale. In addition, there is a requirement for the business name, address of principal place of business, VAT registration number and any VAT accounting schemes used.
MTD for VAT will work on the basis of an interface with HMRC known as the Application Programming Interface (API). The VAT information which is stored digitally must be transferred automatically into the API interface via a digital link. Bridging software can be used for this, and a list of providers of bridging software is shown on HMRC’s website.
In addition to accounting packages, Excel spreadsheets can continue to be used to keep the VAT information provided it is digitally linked to the API.
HMRC has confirmed that there will be a 'soft landing' in the first year, meaning that digital links will not generally be required. HMRC also confirms that cutting and pasting information into the API interface will be acceptable until 31 March 2020.
Practitioners will also have an opportunity to make changes to the figures before they are submitted via the API to HMRC. This will be necessary when the results of calculations performed outside the electronic records (see examples above) are required or other adjustments need to be made. Errors, however, will continue to be accounted for in the same way as before MTD for VAT, either by written disclosure or by including them in the next VAT return as appropriate.
There are also special rules for schemes (for example, retail schemes, flat-rate schemes) that simplify the requirement to keep records digitally.
FREQUENTLY ASKED QUESTIONS
Will HMRC tell clients that they need to move to MTD?
No. It is up to businesses and their agents to recognise which businesses are caught by MTD and to register (via gov.uk website) for the new MTD portal. HMRC plans to write to businesses that appear to be affected (for example those with a Box 6 figure exceeding £85k per annum) but will not follow this up.
What happens if clients don’t comply with the new requirements?
There will be penalties for non-compliant businesses, which are likely to be behaviours-based, but the mechanics and timings of this have not been publicised at the time of writing.
My clients use paper records at the moment and are useless with IT. Can they request exemption on the grounds of age and lack of IT awareness?
Businesses that have already been granted exemption from online filing under the current rules (for example on grounds of religious, age, disability or internet access issues) are expected to be granted exemption from MTD requirements as well.
My client is an overseas company and is compulsorily registered due to the zero threshold for non-established businesses, but only has UK taxable sales of £20k per annum. Is it still caught by MTD?
No. MTD for VAT is only mandatory for businesses with UK taxable (that is, zero, reduced or standard rated) income exceeding the standard VAT registration threshold at the go-live date or after. This is 1 April 2019 for most businesses, but for traders based overseas, the date is 1 October 2019.
What if I or my client has a software issue and can’t submit the data on time?
As with the current rules, if there are any issues submitting VAT return data, call the HMRC helpline as soon as possible, and by the return due date at the latest; otherwise a surcharge liability notice will be issued and late payment penalties may be issued.
Do my clients need to supply all VAT records to HMRC?
No. There are two parts to MTD for VAT: a) keeping records digitally and b) submission of VAT returns digitally. Under b) the only information that will need to be sent to HMRC each VAT return period is the nine VAT return box figures: that is, the same information as is currently required. If and when HMRC requests additional information for compliance checking purposes however, they will expect certain information – as required under a) above – to be available in digital format.
Vaughn Chown, managing partner and head, VAT at Gabelle