19 Nov 2018

Project "Making Tax Digital" HMRC rules

The project called Making Tax digital (MTD) was first discussed by the government back in 2015. The premise behind the idea of MTD was to create a system to ensure that the UK’s tax affairs were one of the most digitally advanced in the world.

HMRC’s initial plan was to revolutionise the Income tax, corporation tax and VAT systems of businesses, individuals and landlords. However, the Brexit vote, followed by the snap election in 2017, put paid to these plans which were replaced with a slower implementation, starting with an obligation only for compulsory VAT registered businesses. This means that from April 2019, businesses where their taxable turnover is in excess of £85,000 in any 12 month rolling period will have to make changes to the way they keep their records and file VAT returns.

The MTD obligations require qualifying businesses to keep digital records and submit VAT return information to HMRC using MTD compatible software. The idea behind the Government using VAT as the first tax to digitise, is that VAT registered businesses are familiar with quarterly reporting and have some experience with filing electronic returns.

Businesses trading below the VAT threshold are not required to file their returns using the MTD provisions, however, they can voluntarily do so if they prefer.

The government has also stated that it won’t bring other taxes into MTD provisions until 2020 at the earliest, their plan being to get the VAT digital system working correctly before widening the scope.

Accountants and other agents have been aware of the changes coming to VAT submissions for some months but have been waiting for clarification on various important issues, not least the fact that many believed the implementation date of 1st April 2019 would be pushed back further.

However, HMRC released an update in early October stating there will be no deferment, other than for a few arease where HMRC are concerned that its own systems haven’t yet been fully tested. These include VAT groups, charities, trusts and overseas registrations. All other businesses with a taxable turnover above the VAT registration threshold will be required to keep their records digitally and submit via MTD compliant software for their first return starting on or after 1stApril 2019.

HMRC’s view is that keeping the records digitally will reduce, if not remove, the errors associated with both manual records and entering manual figures onto the current HMRC portal. Transposition errors are seen frequently and are estimated to cost HMRC billions in lost revenue. It is understood that new MTD software will not only prepare VAT figures but also highlight unexpected and irregular transactions.

The second intended consequence of keeping digital records is that these new systems will allow businesses to be more in control of their finances, and HMRC lists the following benefits to digitisation:

  • Always knowing where you stand when it comes to tax
  • Having access to tax information online in a single place
  • Being able to work collaboratively with an agent
  • Being able to plan and budget more effectively.

The ability to have information on your business closer to real time, will in turn allow both business owners and agent to move from a compliance mindset to one of value added, and allow for the provision of more advisory activities.

The MTD regulations state that a business is required to use a compatible software product or set of products with functions that include:

  • Keeping records in digital form
  • Preserving those records in digital form
  • Creating a VAT return from the records and providing this data digitally to HMRC using the API platform
  • Receiving information from HMRC via API platform in relation to entities return and compliance

Initially there was doubt as to whether recording data in spreadsheets would be an acceptable answer to MTD compliance. But while HMRC prefer the use of an accounting package where the data is checked and verified, they also understand that small businesses can find a solution for their needs within a spreadsheet system. As such there are now bridging software products on the market that can link to spreadsheets and provide the API connection required. These bridging products can also provide an answer for larger businesses that have in house bespoke accounting packages.

The conditions stipulate that the transfer or exchange of data between software programmes must be digital where the data forms part of the digital records. It is not allowed under MTD for there to be any manual transfer of data within or between products. “Cut and Paste” is not classed as a digital link. However, to enable businesses more time to comply with the requirements, there is to be a one-year soft landing process where such transfers are allowable.

During this soft-landing phase, HMRC have said they will not implement fines and surcharges as businesses are getting to grips with the new system, giving them further breathing space in order to get things right.

HMRC understands there are businesses with special VAT requirements such as flat rate, margin, partial exemption or retail schemes and they may need to adjust their figures at quarter end. This is allowable as a single figure adjustment and is not required on a line by line basis.

HMRC has clarified that any records that are not required as part of the VAT return do not need to be kept digitally. For example, purchase details for those on the flat rate scheme. The MTD requirements state the following provisions with regards to recording and keeping information digitally.

Digital records must include:

  • The name of the taxable entity
  • The address of the principal place of business
  • The VAT registration number
  • Name of any scheme used
  • For supplies
    • a) Time of supply
    • b) Value of supply
    • c) Rate of VAT charged
  • For purchases
    • a) As supplies and the amount of input tax for which credit is allowable

Items of mixed rates of VAT can either be recorded as one line with the VAT elements adjusted or as separate lines depending on the limitations of the software. HMRC has also pointed out the certain records such as C79 monthly import certificates must be kept in their original form. Purchase and sales invoices are still required to be kept for a minimum of 6 years if they are not stored digitally in a system accredited by HMRC.

The Making Tax digital rules apply to businesses from the first VAT period starting on or after the 1st April 2019, and the return information extracted from the digital records must be submitted to HMRC using MTD compatible software. The information submitted is the same nine boxes as shown on the current VAT return. Additional information may be extracted from the digital records in the future to support these figures, but HMRC currently has no plans to ask for additional information.

Many aspects of the returns will stay the same, for example the filing frequency and deadlines. If you currently have an exemption from digital filing this will carry over to MTD filing. To obtain this exemption is tough and you must prove one of the following:

  • that you are a member of a religious society whose beliefs are incompatible with the use of electronic
  • your business is involved in insolvency procedure
  • that it is not reasonably practical to make a return using software for reasons of disability, age remoteness of location or any other reason that satisfies the Commissioner.

The decision to be transfer to MTD filing is made by the business if you feel that you meet the requirements to do so. Those who chose to comply without requirement, can opt out again if they make the application to HMRC in writing. Should you be required to comply with MTD initially but your turnover drops below the registration threshold, you must continue under the MTD rules until you cancel your VAT registration.

The current VAT portal will remain open for businesses who are not required to file under MTD and their submissions will continue as they are currently. For businesses who are required to apply the new rules, they must opt into the MTD on-line system. This decision will close off their existing portal and allow them to register for access to a new MTD and digital account.

Going forward as businesses and agents, we need to get our MTD VAT records and submissions correct, and wait for income tax and corporation tax to come under the new regulations. Individuals can already join the pilot for MTD and use the online accounts to submit their tax information. There has been little progress made for software to be able to cope with Corporation tax requirements, but as VAT changes are brought into action I am sure this will force these issues through.

To discuss this or anything else, please call Clare Bowen on 01793 818300 or send her an email.