Making TAX digital for VAT
What is it and why is it happening?
MTD introduces the requirement to keep VAT records in digital form and file returns using software. It is part of HMRC’s drive to introduce digital reporting for most taxes, as seen with the introduction of RTI for PAYE purposes.
HMRC believes billions of pounds of tax revenue are being lost to genuine human errors. By improving how records are kept and information communicated to them, it is expected that some of this hole can be plugged.
Will it create any additional work?
In the majority of cases, MTD should not create any further work in relation to filing VAT returns but it may require the purchase of additional software to enable the correct information to be communicated to HMRC.
When will the rules start to affect my business?
For most businesses the new rules take effect with your first VAT return period that begins on or after 1 April 2019. Mandatory filing is however delayed until 1 October 2019 for certain entities who are classed as having complicated VAT affairs. This includes businesses who are part of a group VAT registration or who make payments on account.
If you believe that you meet the conditions for the October deferral but your correspondence from HMRC does not state this, you must contact them as you need their legal direction to be able to continue to utilise the legacy VAT portal after 1 April 2019.
As explained later, there will also be a light touch approach for the first 12 months you fall within the rules, which mean that not all links have to be digital during this time period. You may feel though that it is better to finalise your new systems from the outset to avoid having to change procedures twice.
What are the exact requirements of MTD?
Under the new rules you must use “functional compatible software”. This means a software program or set of software programs, products or applications that can connect to HMRC systems via what is known as an Application Programming Interface (API). The software must be able to:
- Keep records in digital format as specified by the new rules
- Preserve digital records in digital form
- Provide to HMRC information and returns from data held in these digital records by using the API platform
- Receive information from HMRC via the API platform, although it is currently unclear what this might mean
It is therefore possible that your MTD processes will involve more than one program or product, for example your DMS, a spreadsheet and then an add on product to enable you to file.
A key point is that any links between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records.
What is meant by a digital link?
A digital link is one where a transfer or exchange of data is made or can be made electronically between software programs, products or applications, without involvement or need for manual involvement.
This can include linked cells in spreadsheets e.g. formula in one spreadsheet mirrors source value in another cell, and XML, CSV import/export
The first year you fall within MTD is going to be classed as a soft landing period which means that you will not need all digital links.
“Cut and paste” is not classed as a digital link although it will be allowed in the soft landing period.
What are my options?
There are many different software packages and products on the market that seek to address the requirements of MTD. Some of the DMS providers have however indicated that they will not be making their software capable of filing returns under the new rules. If this applies to your DMS you will need to consider what add on products might be required to enable you to communicate with HMRC.
We also know that some of you have spreadsheets as part of your current VAT reporting that integrate exceptionally well into your control procedures, and it would be counterproductive if this ceased. Spreadsheets can still form part of your VAT reporting but you would need to purchase a spreadsheet add on product which provides the functionality to the spreadsheet to allow it to send the VAT return data to HMRC.
From our experience there are therefore three main scenarios affecting dealers:
Single API enabled software package
- Single software (DMS) to record all sales, purchases and expenses in digital format
- Has necessary functionality to maintain mandatory digital records, prepare VAT return and submit this to HMRC via API
- All links must be digital
- All adjustments such as demonstrator scale charges and VAT on deposits must be posted to the DMS
DMS used with single spreadsheet
- DMS data transferred to spreadsheet
- Adjustments such as scale charges made to spreadsheet
- Spreadsheet add on product used to file return
Multiple spreadsheets perhaps for multiple sites or companies within VAT group
- DMS links to each spreadsheet
- Adjustments made on spreadsheets
- All spreadsheets feed into one summary spreadsheet via digital link
- Any final adjustments then made to summary spreadsheet
- Add on product used to file return
Where can I find additional information?
HMRC guidance can be found on the gov.uk website in VAT Notice 700/22: Making Tax Digital for VAT
A list of compatible software has also been published http://www.gov.uk/guidance/software-for-sending-income-tax-updates
Author: Michelle Malone