VAT and Making Tax Digital

HMRC has announced a radically different timetable for the introduction of Making Tax Digital (MTD).  MTD will apply to businesses whose turnover is above the VAT threshold from 1st April 2019 but only in respect of their VAT records and returns.  MTD for other taxes will not be introduced until 2020 at the earliest.  While the deferment of the introduction of MTD was a relief to many and the new timetable has injected a welcome degree of realism into such a major project, the announcement that MTD would first apply to VAT records and returns is perhaps more surprising.

The logic seems to be that businesses are used to submitting quarterly VAT returns and so the transition to MTD should not be such a burden.  However, there is a big difference between collating information from accounting systems and using that information to complete an online form, which is currently the commonest method of submitting VAT returns, and submitting a return directly via the accounting software.

It is also likely that the MTD return will require the submission of far more data than is currently reported on the current VAT return.

Although MTD is still at an early stage, businesses should start thinking about how they are going to manage the transition.

What about businesses that are registered voluntarily?

Businesses whose turnover is below the registration threshold but are registered for VAT voluntarily will not have to submit MTD returns.

Are there any exemptions from MTD requirements?

Businesses that have genuine difficulties in filing online due to lack of internet access, health and disability issues, etc, may continue to use existing methods of filing.  Businesses claiming exemption must satisfy HMRC that using the internet is not a practical option for them.

What does digital record-keeping mean?

VAT records, so practically all accounting information, will have to be held on digital records. Therefore some businesses that still use manual records or partly manual records will have to change to using entirely digital systems and so they should continue planning to do this as under the previous MTD timetable.

After the original MTD consultation it was announced that electronic spreadsheets could count as digital records as long as there was a means of submitting the information to HMRC digitally.  If this still stands it will be a great help to the many businesses that use spreadsheets to compile the VAT return from different accounting systems, or use spreadsheets to make manual adjustments such as partial exemption adjustments.  However, if more detailed information is required on the VAT return under MTD spreadsheets may not be adequate.  If you rely on spreadsheets to prepare VAT returns you will need to look out for further announcements regarding their use under MTD.  Software will be required to convert spreadsheet data into a form that can be transmitted to HMRC.

Choosing the right software

Businesses affected by MTD must submit VAT returns using software that is compatible with HMRC’s requirements.  For businesses already using off-the-shelf software updates should be available that deal with VAT return submission.  Many packages already have this facility but surveys indicate that most businesses do not use it.  If your software can already file VAT returns directly but you do not use this facility you should consider why it is not used.  If your business has particular issues such as partial exemption you may wish to consider whether your existing system can be adapted so that the software can capture the additional information and adjustments required to complete the return.

Businesses using bespoke software will have to speak to their software suppliers and engineers about compiling and submitting the returns.

Businesses with manual or partly manual records should seek advice regarding the most suitable software for their needs.  The original MTD announcement included a commitment to providing free software for small businesses, however, this will be very basic and suitable only for the smallest businesses (and so unlikely to have turnover exceeding the VAT threshold) or for very simple businesses.

Watch for announcements

The MTD pilot will start this autumn and so there are bound to be further tweaks that arise from the experience of MTD in action.  You should watch out for announcements and updates on MTD from your advisers, HMRC and your software supplier.

One final point to note is that 1 April 2019 is the day the UK leaves the EU so businesses could be dealing with some other changes to VAT also effective on that date.  We live in interesting times