HMRC is phasing in its landmark Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system.

The government had planned to require businesses to keep digital records and update HMRC quarterly for income tax from 2018 but these proposals have been deferred. Instead, Regulations have been issued which set out requirements for MTD for VAT.

Under the new rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD ‘functional compatible software’.

The new rules have effect from 1 April 2019, where a taxpayer has a ‘prescribed accounting period’ which begins on that date, and otherwise from the first day of a taxpayer’s first prescribed accounting period beginning after 1 April 2019.

VAT returns for periods commencing on or after 1 April 2019 will not be able to be submitted using the existing online box filling system.

VAT Regulations and guidance

Although Regulations have now been issued, HMRC guidance on the application of parts of the Regulations has not been finalised. Draft guidance has been issued which means there may be changes to some of the detail contained in this letter and the appendix. Also, the guidance does not provide full details on various aspects of the new system and so there are questions that currently remain unanswered.

HMRC is running a pilot scheme for MTD for VAT this year which hopefully will iron out some of the issues that will arise in the implementation of the digital system.

Software

Under the new MTD rules, businesses will have to use ‘functional compatible software’. This means a ‘software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)’. This must be capable of:

• keeping records in digital form as specified by the new rules
• preserving digital records in digital form
• creating a VAT return from the digital records held in compatible software and submitting this data to HMRC digitally
• providing HMRC with VAT data on a voluntary basis
• receiving, via the API platform, information from HMRC to ascertain compliance. It is as yet unclear what this means, but it may relate to HMRC’s ability to send compliance prompts and nudges.

How are the records to be kept?

Keeping digital records will not mean businesses are mandated to use digital invoices and receipts but the actual recording of supplies made and received must be digital. It is likely that third party commercial software will be required. The software will not be available from HMRC. The use of spreadsheets will be allowed, but they will have to be combined with add-on software to summarise and file to meet HMRC’s requirements.

Providers of accounting software ( eg Sage, Quickbooks, Xero, Freeagent amongst others) will be upgrading their programs to be able to submit the VAT information to HMRC in a new manner. It remains to be seen whether providers will require users to update their software to up to date versions of their software.

Example

A business may use one piece of accounting software to record sales and purchases, transferring the totals into a spreadsheet to calculate the VAT return. The information will then sent to a piece of bridging software to submit the VAT return to HMRC. Here three pieces of software are involved. To qualify as functional compatible software, the links between them will have to be digital.

Helping with the challenges

Whatever the size of your business, there is a time of great change ahead, and we are on hand to help with the challenges. The income and corporation tax requirements of the Making Tax Digital for the business programme have been delayed but the government is still fully committed to its implementation, probably as early as April 2020.

Although we are still waiting for more detail from HMRC and the software houses, there are issues that VAT registered businesses would do well to consider now. One key area is whether business transactions are currently recorded digitally. If they are not, consideration should be given to recording some/all transactions on a digital basis.

We have reviewed our business clients who are VAT registered and you can be divided into four categories being:-

1. You maintain your own accounting records using a software package and you file your own VAT returns.
2. We maintain your accounting records using a software package and file the VAT returns on your behalf.
3. We calculate and file the figures for your VAT return principally using spreadsheets.
4. You use spreadsheets or other means to calculate your VAT return figures and file your own returns.

Categories 1 and 2 - we will be monitoring the progress of the software providers

Category 3 - we will be reviewing with you whether to switch transaction recording to bookkeeping software although, at this time, we do not envisage ceasing to use spreadsheets for clients with a limited number of transactions.

Category 4 – we would suggest a meeting sooner rather than later.                                                      

We would be happy to help you with any issues arising from MTD for VAT.

As further details about MTD for VAT emerge from HMRC, we will of course continue to keep you up to date.

If you would like any more information, please do get in touch by calling 01623 490120 or email This email address is being protected from spambots. You need JavaScript enabled to view it..