Update on Making Tax Digital for VAT (July 2018)
Making Tax Digital (MTD) is the biggest change in tax administration in two decades i.e. since Self Assessment was introduced in 1997.
MTD is the Government’s flagship scheme that requires online tax filing and payment, as well as digital record keeping. All business taxes will be part of the scheme, but only VAT currently has an actual roll-out date, with the rest following in 2020 at the very earliest.
MTD’s impact on businesses large and small is likely to be significant. The Government says the scheme will reduce tax errors and therefore generate £610 million in extra revenue in 2020-21. However, HMRC also emphasises the benefits of digital record keeping for businesses, including real-time record keeping.
Personally, as an accountant with well over 30 years of practical experience helping small businesses, I do not believe that these tax errors will be reduced. Is it so difficult to type nine numbers into the HMRC website? In my view, if you cannot type nine numbers correctly then what chance do you have of typing all the other numbers into your digital accounting records?
If you are a VAT registered business then I am sure that you will still have received nothing from HMRC regarding MTD. There has been much criticism that HMRC have not notified businesses of far reaching changes that come into effect on 1 April 2019. Businesses have therefore not been able to plan.
For some businesses they will have to incur thousands of pounds to acquire new software and possibly upgrade their hardware to run the new software. It could also mean major changes to how they keep their accounting records. As we are now only seven months from the commencement of a new system it is extremely concerning that HMRC has not communicated the changes to business. Accountants and other professional advisers have been left to educate their clients. It appears that in the next few weeks that HMRC will be starting its publicity campaign. Do not hold your breath!
Digital by design
VAT registered businesses with a taxable turnover above the VAT threshold of £85,000 will be mandated to keep digital VAT records and file their returns using MTD compatible software from April 2019.
This may include dedicated record-keeping software or a combination of software packages or spreadsheets. MTD does not require you to keep additional records for VAT, but to record and file them digitally.
If VAT taxable turnover subsequently falls below the VAT registration threshold businesses must still continue to follow the MTD rules i.e. keep digital records and file their VAT returns through compatible software.
A business with a turnover below the VAT threshold of £85,000 e.g. that has voluntarily registered for VAT can also voluntarily join MTD for VAT.
In determining which businesses will be forced to use compatible software and which businesses will be able to continue to file their VAT returns through the Government Gateway the last four VAT returns before the commencement of MTD on 1 April 2019 will be relevant. Those businesses that fail the turnover test will have access to their VAT service on the Government Gateway restricted so that they can no longer file VAT returns through this method.
It has been several months since I last updated all of my VAT registered clients regarding the implications of Making Tax Digital.
Part of the reason for not providing more recent updates is that there appeared to be a strong chance that, like the Income Tax and Corporation Tax aspects of MTD, it was going to be pushed into the long grass and delayed for many years. Whilst the latter aspects have been delayed to ‘at least 1 April 2020’ HMRC is pushing ahead with the VAT deadline of 1 April 2019.
Another reason for not updating my clients is that many of them are micro entities that use Excel spreadsheets rather than commercial software, e.g. Sage. Very recently, a short list of software providers has been created of software providers that have been formally ‘accepted’ by HMRC to provide compatible software. I saw little point in pushing my spreadsheet clients into more expensive and complicated software, e.g. Sage, when their spreadsheets are perfect acceptable for the general running of the business. Software solutions are now entering the market to assist clients who maintain their accounting records on spreadsheet clients.
Compatible software, through an Application Programming Interface (API), will not only keep records digitally it will also file VAT information to HMRC and receive information back from HMRC. It is the latter two criteria that practically stop businesses from using spreadsheets solely for their VAT compliance.
An API is technical term describing how one software package connects digitally to another to transfer data to HMRC.
Changes in how you keep your records
Currently, 89% of VAT registered businesses will have to change the way they file their VAT returns. For many reasons, sometimes complex, and sometimes for historical reasons, most VAT returns are filed through the Government Gateway. This allows a business to enter the nine numbers from their VAT return into an online grid and file the VAT return. The ability to file your VAT returns this way for businesses with a turnover in excess of £85,000 will cease on 1 April 2019 and they must then use compatible software.
Lots of small businesses keep their accounting records using spreadsheets. If you use spreadsheets, you must be able to submit the required data to HMRC digitally, for example, by using MTD-compatible bridging software.
Bridging software allows relevant data to be digitally exchanged from the spreadsheet or other source where the digital records are kept, directly to HMRC. The summary information must not be physically re-typed into another software package.
HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world and MTD is making fundamental changes to the way the tax system works.
Many businesses use an accountant and MTD will allow agents to continue to provide a full service in supporting their clients.
HMRC will not be offering its own free software products. HMRC is working very closely with the software industry to ensure the availability of a wide range of products for businesses at a variety of different price points. Commercial software developers are the only organisations that will therefore help businesses to keep their records digitally and integrate with HMRC systems.
HMRC argue that the benefit of this approach is that commercial software developers can offer a more flexible and tailored range of options, functionality and technical support. However, these companies are not charities and will charge for their software.
For VAT, MTD doesn’t change how often businesses have to send information to HMRC, but rather how they do it.
HMRC recognises that not everyone will be able to do this. Where for example a business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers) may be exempted.
Additionally, if it is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location (i.e. no practicable internet connection) or for any other reason, you may be exempted.
Therefore, if your turnover is above £85,000 then unless you wish to become a practicing member of a religious society that cannot and will not use computers then you will have to pull your socks up and move to the more costly and more time consuming method of filing your VAT returns.