Making Tax Digital for VAT
Michael Allapitan, Director, Real Estate
Making Tax Digital (MTD) for VAT is the first part of Her Majesty's Revenue and Customs (HMRC’s) wider Making Tax Digital (MTD) initiative. HMRC aims to become one of the most digitally advanced tax administrations in the world. The implementation of MTD is seen to transform the UK’s tax administration so that it is more effective, more efficient and easier for taxpayers to get their taxes right.
HMRC’s implementation of MTD represents a significant operational change in the UK’s taxation system.
MTD for VAT introduces digital filing and record-keeping requirements for all VAT registered entities whose annual taxable turnover exceed the threshold of £85, 000. This regulation applies to UK VAT reporting entities, both based in the UK and overseas.
The new rules require VAT businesses above the threshold to maintain “digital records” and file their VAT returns via “functional compatible software”:
- Digital record-keeping means that the appropriate system must provide a digital journey of VAT records. HMRC require a digital link between the submitted returns and source data without manual intervention. A digital link is an electronic or digital transfer, or exchange of data, between software programs, products or applications.
- Functional compatible software means a software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API).
Whilst this new regime introduces a substantial undertaking to affected businesses, it should be noted that the other main aspects of VAT reporting obligations remain unchanged.
MTD for VAT will require a change in the way VAT returns are digitally linked and submitted, however, the manner in which the returns are calculated, frequency of returns, as well as deadlines for filings and payments, remain unchanged.
Who is affected?
From 1st April 2019, all VAT registered businesses whose taxable turnover exceed the £85,000 per year threshold are required to adopt the MTD for VAT requirements. VAT Notice 700/22: Making Tax Digital for VAT also provides limited exemptions e.g. under insolvency procedure.
Businesses otherwise exempt from the requirement may opt in voluntarily if they so wish.
Some milestones are detailed below for VAT return periods commencing 1st April 2019:
- 1 April 2019 – VAT return period start date under MTD
- 7 June 2019 – filing deadline for first monthly VAT return under MTD
- 7 August 2019 – filing deadline for first quarterly VAT return under MTD
HMRC had originally stipulated a mandation of 1 April 2019, however, to prepare its systems for businesses with more complex VAT affairs, HMRC has since decided that the mandation date for the following types of VAT reporting entities shall be deferred until VAT return periods commencing 1 October 2019 (“deferred group”):
- Trusts and unincorporated “not-for-profit” organisations
- Local authorities and public sector entities
- Public corporations
- Overseas-based businesses
- VAT group/divisional registrations
- Entities under Payments on Account
- Annual accounting scheme users
The only definitive way to determine if a particular business is included within the deferred group is through receipt of correspondence from HMRC stating that the entity is eligible for the deferral. HMRC has said that letters were sent out recently to the relevant businesses to notify them of their obligations under MTD regime and to confirm their adoption dates.
Businesses who believe that they are included within the deferred group but have yet to receive such HMRC correspondence are advised to contact HMRC’s VAT helpline immediately.
One-year soft landing period
A vital feature within the implementation of MTD rules for VAT is the concept of a soft landing. HMRC recognises that most businesses currently prepare their VAT returns using spreadsheets with minimal digital links.
This is welcome news for such businesses as it provides them with additional time to prepare for full MTD compliance a year later.
The MTD rules afford businesses a period of one year from its initial mandation date to be exempt from the full digital audit trail to source information.
What remains a compulsory requirement during the soft landing period is the digital link between the VAT return spreadsheet and the bridging software. The bridging software is then used to submit the returns to HMRC via an API platform.
HMRC confirmed the soft landing period which is either:
- April 2019 to 31 March 2020; or
- October 2019 to 30 September 2020 for the deferred group
Practical implications and considerations
- For affected VAT reporting businesses, the key considerations are:
- Documentation of current VAT reporting process
- Gap analysis against the new requirements
- Testing of data quality and integrity
- Implementation of required changes to achieve a MTD compliant process
Many businesses will need to invest time and resources to ensure compliance with the MTD requirements. Most of the work involved will be in the analysis of existing gaps between the current process vis-à-vis the MTD requirements.
The focus then turns to the technological aspects where businesses should carefully consider whether to adopt a full MTD approach or to take advantage of the soft landing.
Functional compatible software
HMRC lists on its website a number of software providers which have undergone appropriate testing and deemed to adequately meet MTD rules and requirements. Businesses are encouraged to speak to their current software providers or to one of the HMRC recognised software suppliers to explore suitability of their IT infrastructure.
Whilst HMRC chose VAT to be the first tax type to report under the MTD rules, it is expected that other taxes will follow suit in 2020. Businesses need to consider this when appraising the suitability of their MTD solutions.
How can SANNE help?
At SANNE, we recognise that the evolving landscape of tax rules and regulations could present challenges to businesses.
We have been actively liaising with HMRC, software developers and tax professionals to stay abreast with the developments on MTD.
We have partnered with our accounting software provider to ensure that their platform meets the new MTD requirements and that they are on the approved HMRC list.
Our team of Real Estate accountants can provide support to navigate through the requirements. We can also provide a reporting solution for clients whom may not have their own solution available in time.
As the MTD for VAT regime approaches, we are confident that SANNE are well prepared to help our clients comply with the new regulations.
For further information about SANNE’s real estate services, please feel free to contact: