MAKING VAT DIGITAL
December 2017
The government’s announcement of a delay to digital reporting for income tax has placed VAT at the forefront of the Making Tax Digital (MTD) programme. But, to date, most of the information released by HM Revenue & Customs (HMRC) has been on the direct tax programme. So, what do we know about Making VAT Digital (MVD)?
Key points
Both companies and unincorporated businesses with turnovers over the VAT threshold (currently £85,000) will fall within the MVD regime from April 2019. Once in the regime, they will stay there even if their turnover later falls below the registration threshold. VAT registered businesses under the threshold will be able to opt into MVD if it suits them, but will otherwise remain on the existing system.
Businesses within MVD will need to keep digital records and use MTD-compatible software to submit their VAT returns. There will be, at least initially, no change to the filing or payment deadlines or to the information actually submitted to HMRC as part of the VAT return.
Supplementary data
Although there will be no requirement to submit more information than is included on the current VAT return, HMRC has said that businesses will be able to submit supplementary data voluntarily, and that providing extra information will have benefits for business as well as for HMRC itself. This could indeed be the case if providing extra information allows HMRC to deal more efficiently with a business’ VAT affairs, or target enquiries more effectively, but much will depend on the final detail – and on whether it is straightforward for businesses to prepare and submit any additional information.
Digital records
There will be no requirement to keep underlying records (invoices and receipts) in a digital format. Businesses will, however, need to store transactional information digitally. Retailers within the VAT retail schemes will be able to keep a record based on their daily gross takings rather than recording details of individual sales.
Compatible software
One of the big challenges for both HMRC and businesses in the transition to a digital VAT system will be the availability of suitable software. Relatively few businesses – around 12% – currently file their VAT returns via a software package, and it is likely that the majority of these are straightforward. The complexities of the UK’s VAT legislation means that many businesses, even if they use a software package for accounts purposes, will currently use spreadsheets or manual calculations to arrive at their VAT return figures.
Under MVD, businesses (and/or their agents) will be able to use a combination of software packages to keep digital records and to generate the VAT return. HMRC’s aim is that information should flow direct from one software system to the next (ie there should be no manual re-entry of data), to reduce error. However, to deal with the complexities of VAT, the legislation will allow certain adjustments to be manually calculated and input as part of the process. In addition, HMRC has announced that there will be a ‘soft landing’, giving businesses an extra year to ensure digital links are in place between their accounting systems and MVD software.
As with quarterly reporting for income tax, HMRC will not themselves produce any software, but will work with third party software suppliers to generate a range of commercially-available software options. A small-scale trial is planned to start by the end of 2017, with a wider trial due from April 2018. Experience from the income tax trial suggests that this is unlikely to be open to all businesses from the start – HMRC is likely to begin with those that are least complex and gradually expand. There will, therefore, be limited time for many businesses to trial the reporting system before it is mandated in April 2019.
VAT schemes
The government has confirmed that businesses will continue to be able to use existing VAT schemes under MVD, including the flat rate scheme, cash accounting and annual accounting. Businesses using these schemes will not be expected to keep more detailed VAT records than are currently required, and those in the annual accounting scheme will not be required to make more frequent submissions to HMRC.
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