MTD.pngMaking Tax Digital for VAT: Where are we now, and who will be affected?

The amended Making Tax Digital timetable announced in July shifted its focus to VAT. So what do we now know about who will be affected and when?

The draft legislation issued so far focuses on income tax issues. While the draft Finance Bill 2017-2019 deal with income tax matters, we don’t have sight of any VAT regulations yet, as HMRC has only issued an overview document of ideas about what the VAT regulations may contain.

We do have draft regulations for MTD which deal with the general matters which should be common to all taxes:

HMRC has also issued an explanatory note on the MTD notices which will be issued to taxpayers to require them to comply with the MTD regime.

Who will be affected?

The first businesses to enter the new MTD regime will be those who are VAT registered (in the UK) and have turnover equal to or in excess of the compulsory VAT registration threshold (currently £85,000).

But note:- once the business is within the regime it won’t be able to exit, even if its turnover falls below the VAT registration threshold at a later date.

Businesses with wholly exempt income, or that only have small amounts of VATable income, will not be drawn into the MTD for VAT regime

Businesses that have voluntarily registered for VAT (those below the VAT threshold or that are not required to do so) will not be required to make MTD reports but will be able to do so voluntarily.

vat.jpgWhat must businesses do?

Businesses within MTD for VAT will have two obligations:

  • keep digital records of all transaction details, within software that is capable of linking directly to HMRC’s systems; and
  • report the VAT return data via that software directly to HMRC, within five weeks of the end of their VAT quarter.

Only the totals for each of the nine boxes on the VAT return will need to be reported. The business can voluntarily report supplementary information on its transactions and the calculation behind each total for the nine boxes, but this will not be compulsory.

The submission deadline for MTD for VAT aligns with the current VAT return filing deadline, but it will not align exactly with the MTD for income tax deadline, which will be exactly one month after the end of the quarter for which the MTD report is being supplied – ie one week earlier.

A business will be able to submit the voluntary supplementary information for VAT (ie to align with income tax deadline) and send the final VAT return later.

When will it start?

The overview documents for VAT regulations state that it will come into being from 1 April 2019. But before then we need to get through a period of consultation on the draft regulations, and a full year of testing of systems for VAT reporting – which has not yet started.

The changes to VAT and customs duties brought about by Brexit may well apply from 1 April 2019, which is exactly the same timing as the commencement date for MTD for VAT....

Challenges

As around 12% of VAT-registered businesses use accounting software to submit their VAT return directly from their accounting software to HMRC, with no intervening step (as required for MTD), the software producers have got a long way to go to bridge that gap. Quickbooks OPnline and Xero hqave assured us they'll be ready in good time..

There will be particular issues for businesses who use any type of VAT scheme which requires adjustments to the accounting figures such as:

  • Flat rate scheme (FRS)
  • Tour operators margin scheme (TOMS)
  • Cash accounting