From April 2019, most VAT registered businesses, including charities, will have to change the way they submit their VAT returns to HMRC as part of the Government's Making Tax Digital (MTD) agenda. With the deadline looming, many charities still have some way to go to be ready for the changes. The new requirements also apply to VAT-registered trading subsidiaries of charities.
What is Making Tax Digital?
Making Tax Digital is the Government's ambitious plan to bring the UK’s tax system into the 21st century and transform the way taxpayers interact with HMRC.
From the Government's perspective, Making Tax Digital is designed to help organisations steer clear of human errors, get their tax bills right and give them a clearer view of their tax position in-year.
What are the implications of Making Tax Digital for VAT-registered charities and VAT-registered trading subsidiaries?
With only a few exemptions from Making Tax Digital for VAT available, it is expected that most VAT-registered entities trading over the VAT threshold of £85,000 will be required to keep records in a digital format, to ensure that the transfer or exchange of VAT information is digitally linked and submit their VAT return information to HMRC using MTD-compatible software.
What will my charity and/or its subsidiary company need to do to prepare for Making Tax Digital before next April?
Anyone affected by these changes must ensure that they are using MTD-compatible software by April 2019. To be compatible, the software (or a combination of software packages and programs) must include an Application Programme Interface (API).
The API will create a link between the charity’s / trading subsidiary’s accounting software and HMRC's systems. The API will enable the entity to submit the existing nine box VAT return figures to HMRC directly from their accounting software (i.e. it will no longer be possible to manually input the VAT return figures into HMRC’s online portal). In addition, in the future the API will allow the entity to submit supplementary data to HMRC and enable HMRC to communicate with the entity (e.g. raise queries etc).
What if we use multiple pieces of accounting software?
If your VAT return is compiled from more than one piece of accounting software your software packages must, from April 2020, be digitally linked for the most part. A digital link is designed to ensure that the information flows from one accounting package to another without any requirement to manually input or transfer data.
What if I use spreadsheets?
There is some good news for organisations that use spreadsheets to calculate their VAT return, for example organisations that must grapple with partial exemption calculations, fuel scale charges and other adjustments. The calculations / adjustments do not have to be digitally linked to the accounting software, instead only the final adjustment figure is required to be manually inputted into the accounting software. Alternatively, the spreadsheet can be API-enabled itself to allow the VAT return information to be delivered to HMRC directly from the spreadsheet.
What are the penalties for non-compliance to Making Tax Digital?
HMRC has indicated that there will be a 'soft landing' period between April 2019 and April 2020 during which there will be no financial penalties for record keeping failures, nor will there be a mandatory requirement for there to be a digital links between the accounting software / programs which make up the VAT Return records. However, there must be an API from the outset creating a link between the accounting software of the charity / trading subsidiary and HMRC.
Where can I get help with Making Tax Digital?
There is lots of information on the gov.uk website to guide you through the process and your accountant should also be able to help. It's advisable to contact your software provider in the first instance and confirm whether it will be providing an API, and, if so, whether an upgrade will be required to get access to the API.
Many charities will undertake a readiness review to ensure they're ready for the switchover – this will include mapping the VAT return process to document information flows and ensuring the accounting software is configured efficiently to reduce manual intervention within the VAT return process.