Making Tax Digital in...

2019/04/01 00:00:00

MTD for VAT

The MTDfVAT pilot opened on 16 October 2018 for around half a million businesses whose affairs are up to date and straightforward, and will extend to most other business types over the coming months.

A small group of customers with more complex VAT affairs are being given a further 6 months to prepare and have until 1 October 2019 before they need to comply. This will ensure there is sufficient time for testing the service with them in the pilot before they are required to join. These include: trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.

The list of compatible software continues to grow and HMRC is working with more than 150 software suppliers who have said they’ll provide software for Making Tax Digital for VAT in time for April 2019. There are separate lists of products that have been fully tested and those that are still in development. HMRC is working closely with software providers to ensure a range of suitable products will be available at a variety of price points. It is unlikely that a free software product with MTD for VAT functionality will become available.

The list of compatible software continues to grow and HMRC is working with more than 150 software suppliers who have said they’ll provide software for Making Tax Digital for VAT in time for April 2019. There are separate lists of products that have been fully tested and those that are still in development. HMRC is working closely with software providers to ensure a range of suitable products will be available at a variety of price points. It is unlikely that a free software product with MTD for VAT functionality will become available.

Maintaining paper records will cease to meet the legal requirements in tax legislation.

Digital records can be maintained in more than one program or software product. The use of spreadsheets, either to record individual transactions or as part of a suite of software and spreadsheets is permitted. However, the spreadsheet will need to be either API enabled or used in combination with an MTD compatible software product so that data can be sent to and received from HMRC systems; an existing spreadsheet alone is not a free way to comply with the MTD for VAT requirements.

If you run a VAT-registered business with a taxable turnover above the VAT registration threshold (currently £85,000) you are required to keep digital VAT business records and send returns using Making Tax Digital (MTD)-compatible software for VAT periods starting on or after 1 April 2019.

Businesses with a taxable turnover below the VAT threshold can also sign up for MTD for VAT voluntarily.

Following the VAT roll-out the next phases will include MTD for income tax (for the self -employed and those with income from property) and MTD for corporation tax but not before April 2020 at the earliest.

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    31 January 2019

    Self assessment tax return to be filed for 2017/18.

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    1 April 2019

    All VAT registered businesses and organisations with taxable turnover above the VAT threshold of £85,000 will be required to maintain their accounting records digitally a software product or spreadsheet and submit their VAT returns to HMRC using a functional compatible software product that can access HMRC’s API (Application Program Interfaces) platform. Exceptions – see Oct 2019

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    1 October 2019

    Exceptions from April 2019 join including trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return (such as government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.

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    31 January 2020

    Self assessment tax return to be filed for 2018/19.

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    1 April 2020

    The Government has given an undertaking that MTD (electronic record keeping and quarterly reporting) will not be made mandatory for other taxes (i.e. income tax and corporation tax) until the system is working well and not until April 2020 at the earliest.

What you need to know.

Making Tax Digital (“MTD”) is H M Revenue & Customs (“HMRC”) drive to close the “Tax Gap” and to make the UK “the most digitally advanced tax authority in the world”. It will mean significant changes to how and when we deal with our tax affairs.

The first businesses to be affected by Making Tax Digital will be VAT registered businesses with turnover above the VAT threshold. These businesses will be required to maintain digital accounting records and use Making Tax Digital compliant software to file their VAT returns, from the first VAT quarter starting on or after 1 April 2019.

Where are we now?

HMRC opened 6 consultations in January 2017 which are now closed, and have since opened a further 2 consultations. One of these, “interest harmonisation and sanctions for late payment” closes on 2 March 2018.

A pilot is due to commence in April 2018 to test that the software (both the commercial products and HMRC’s systems) work properly under the full range of business types and VAT reporting arrangements. Businesses can continue to use spreadsheets to maintain their books and records although they will need to combine this with third-party software, using API’s (“Application Programme Interface”), to ensure a seamless flow of data between the business and HMRC.

If you are a VAT registered business with taxable turnover above the VAT threshold you will need to keep your business records digitally from April 2019.
Digital records will include spreadsheets but information can only be submitted via API’s (“Application Programme Interface”) and therefore submission to HMRC will need to be through either an API enabled spreadsheet, bridging software or an appropriate accounting software package.
HMRC will not be providing free software for MTD for VAT and the indication from software providers is that it is not commercially viable for them to create free software either.
Certain information will be fed to your Personal Tax Account (“PTA”) by third parties such as bank or building society interest, state and other pension income and any employment income. It will be your responsibility to check this is correct.

A PTA is your personal tax record with HMRC and if you have not already activated it, this needs to be done via the Government Gateway here.
Agents cannot currently access PTAs, although HMRC are working on this as this will be a fundamental requirement if MTD for income tax is to work.

In order to comply with MTD for VAT initially businesses will only have to upload the totals for each of the existing nine boxes on the VAT return
HMRC’s ultimate objective is for everyone to use accounting software for record keeping and VAT filing, which will enable HMRC to close its existing online VAT return system (for now it will remain open for VAT traders with turnover below the VAT threshold who have registered voluntarily).
In time it is likely that more detail will be required to be submitted.

Yes. Whilst there could still be some changes to the specifics and implementation dates, it is likely all businesses will have to engage with HMRC in this way unless you are among the ‘digitally excluded’ based on factors such as religion and disability.

At the moment, no, although you may be able to make voluntary payments on account from April 2019, if you wish. However, a move to real time reporting suggests that tax payment dates will change in the future.

We recommend that you activate your PTA if you have not already done so in order to familiarise yourself with the information held there, which includes useful information such as state pension entitlement projections.
If you are not already keeping your accounting records on a software package capable of ‘talking to HMRC’ we also recommend that you consider moving to one of these systems. This will make compliance with the MTD requirements easier but also enable you to generate better quality management information to assist with the running of your business.

More of your tax return information will be sent to HMRC direct from third parties such as banks, employers or pension providers from April 2018, although you will still need to check this information is correct in your PTA.

We can help you get started if you are not already keeping your accounts on compatible software, or we can do your bookkeeping for you. We can also help with the quarterly uploads, once these are needed, and will be able to prepare your year-end figures for you. Once HMRC has resolved the agent access problem to PTAs, we will be able to review your estimated tax position to make sure this is correct and explain what the estimates actually mean.
We have been actively involved in the consultation process throughout and are therefore well placed to guide you through the MTD requirements.

The main proposals continue to be:

  • A mandatory requirement for all businesses and landlords to keep their records digitally, although keeping invoices and receipts electronically will not be mandated;
  • Making quarterly uploads of business results to HMRC, together with a year-end report to include all accounting and tax adjustments;
  • HMRC not asking for information more than once, with better use being made of information already provided by third parties such as banks, employers and pension providers; and
  • The optional ability to pay your tax earlier

When does all this start?

VAT reporting under MTD

VAT reporting for business over £85,000 VAT threshold

Start date: 1 April 2019

All businesses with taxable turnover over the VAT threshold of £85,000 will have to start reporting VAT returns via MTD from 1 April 2019. This includes companies, LLP’s, partnerships, sole traders and landlords and charities.

VAT reporting for VAT registered businesses with turnover less than £85,000 (under VAT threshold)

Start date: 1 April 2020 (at the earliest, details not yet confirmed by HMRC/Treasury)

All businesses with taxable turnover under the VAT threshold of £85,000 will have to start reporting VAT returns via MTD from 1 April 2020 at the earliest. There is likely to be an exemption for businesses and landlords with very small turnover. The level of this exemption has not yet been set but a figure of £10,000 has been suggested in some commentary.

Income and corporation tax reporting under MTD

Unincorporated businesses (e.g. Sole traders, Landlords, and other self-employed people)

Start date: 1 April 2020 or later

Sole traders, self-employed people and landlords will have to start reporting on a quarterly basis from 1 April 2020 at the earliest. This will involve 4 quarterly returns and an end of year declaration.

Partnerships

Start date: 1 April 2020 or later

This group includes partnerships, and LLP’s and will include many accountancy, architect and legal practices. Approximately 400,000 partnerships will have to report their tax positions and obligations through a nominated partner under MTD from 1 April 2020.

Through their nominated partner, partnerships will fulfil the obligations of MTD, maintaining digital records and providing regular updates on behalf of all the partners.

Each partner’s estimated income would be based on the profit allocation as reported to HMRC. As a result, each partner will not need software or, maintain their own digital records and regularly update HMRC unless they have other business interests.

There is, as yet, no upper limit for taking part in MTD for partnerships, although HMRC has suggested an exemption threshold for larger businesses could be put in place as their affairs become too complicated.

  • Businesses paying corporation tax Start date: 1 April 2020 or later From 1 April 2020, quarterly reporting starts for businesses paying corporation tax. There is, as yet, no upper limit for taking part in MTD for businesses, although HMRC has suggested an exemption threshold for larger businesses could be put in place as their affairs become too complicated.

Other Frequently Asked Questions...

What is the definition of taxable turnover?

Taxable turnover has the same definition as it does for VAT purposes and therefore includes standard rated, reduced rate, and zero rated supplies.

Will the rules apply to a business which is not VAT registered (because it makes exempt supplies) but has a turnover above the threshold?

No. Consider only taxable turnover as defined for VAT. Also, if the business isn’t VAT registered, MTD for VAT is irrelevant.

How will adjustments for partial exemption fit in?

HMRC has set out various software journeys it expects business will use and these can be seen here.
Example 6 in the document explains how adjustments can be made in spreadsheets provided the total figures are manually (or digitally) transferred into the MTD compliant software (which could simply be an API enabled spreadsheet).

I record receipts and payments on a spreadsheet and my accountant adjusts for debtors and creditors at the year end. Will I now need to record customer and supplier invoices?

The spirit of MTD is that a business records each transaction as close to real time as possible but this is not always practical. The draft secondary legislation requires that the information is recorded no later than the earlier of the date by which the taxable person is required to make the return or the date the return is made for the prescribed accounting period. This means you will still be able to gather documents and ask your accountant to record the transactions digitally.

I use the cash accounting scheme? How will MTD work for me?

The current rules will continue to apply (i.e. VAT should be recorded based on the date cash is paid / received). The only difference is that the business must comply with the digital record-keeping requirements.

What is the position for a business which registered for VAT when its turnover exceeded the threshold, and then its turnover falls well below £85,000?

After 1 April 2019, the business would remain in MTD for VAT even if turnover falls below the VAT registration threshold, for as long as it remained VAT registered.

Will there be any exemption available based on the age of an individual or where the business does not use a computer?

The draft VAT regulations propose a new regulation 32B(1)(c) which exempts a person ‘for whom the commissioners are satisfied that it is not reasonably practicable to make a return using a piece of software for reasons of disability, age, remoteness of location or any other reason.’ An exact age is not specified.

I use a bespoke spreadsheet. How will the software be able to interpret which numbers to send to HMRC and will spreadsheets have to be in a standard format?

Spreadsheets may need to transfer the required 9 box totals into a special API enabled spreadsheet for submission and it may be necessary for information to be maintained in the cloud to enable this. More will become clear later, as software solutions are released.

If HMRC only wants the nine numbers currently received using the online portal, what is the point of bringing in MTD to receive the same information?

HMRC’s view is that this is a first step to more digitisation by business, with the ultimate objective of everyone using accounting software for record keeping and VAT filing, so allowing HMRC to close its existing online VAT return system.

I currently submit monthly returns. Will I have to move to quarterly returns?

No. Businesses with non standard return periods (i.e. monthly or annually) will continue as normal although they will need to comply with the digital record-keeping requirements.

Are charities exempt from MTD for VAT?

Not-for-profit organisations that are not companies are part of the 6-month deferral and so are not mandated until 1 October 2019.

When will API (Application Programme Interface) enabled spreadsheets be available and how do we access them?

No fully tested solutions are currently available (as at Oct 2018). Developers have some in the pipeline but the details of how they will work, their format, costs etc are as yet unknown.

We already have software that connects to HMRC for VAT returns. Will this software be MTD compliant without any changes?

Maybe. We are aware of some software suppliers where older versions will require upgrading in order to be MTD compliant. We therefore recommend that you check the position with your software supplier.

How will the flat rate scheme operate under MTD?

Businesses using the flat rate scheme are not required to maintain digital records of purchases unless they are capital in nature and cost more than £2,000.

My business is on the annual accounting scheme with a VAT accounting date of 31 May. What is my MTD start date?

Annual accounting scheme users are part of the 6 month deferral and so not mandated until 1 October 2019. The first annual scheme affected will, therefore, be those starting on or after 1 October 2019.

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