The transition to making tax digital (MTD) represents one of the most fundamental changes to occur to the UK tax system for decades. HMRC is concerned that basic VAT accounting errors are resulting in significant VAT loss to the Treasury and believes that MTD will play a major role in reducing this. Whilst it is expected that MTD will eventually apply to taxes such as income tax and corporation tax, VAT will be at the vanguard of these changes with effect from 1 April 2019, when MTD reporting becomes mandatory for all VAT registered businesses trading above the current VAT registration threshold of £85,000. With just less than 12 months to go until then, affected businesses will need to ensure that they fully understand the changes they will need to make to ensure that they are MTD compliant.
For many organisations this will require significant changes to their accounting software and is likely to require support from both their internal IT function and external third party software providers . Businesses will also need to factor in sufficient time to test the updated systems to ensure that the required changes are effective. Accordingly, whilst the go live date of 1 April 2019 is some way off, the time and resource required to implement the changes needed for MTD should not be underestimated.
What are the key changes for VAT under MTD?
There are essentially two key areas of change: firstly in relation to how VAT return information is compiled and submitted to HMRC; and, secondly in relation to what information has to be retained digitally by the business.
At present, most VAT returns are completed by manually filling in the required fields and submitting this information via HMRC’s online portal. This will change from 1 April 2019 as VAT return data will need to be automatically submitted to HMRC via MTD compatible software using application programme interfaces (APIs) which will act as a digital bridge between HMRC's systems and the business’s accounting software. The intention is that the VAT return information will flow from the source data directly to HMRC with limited scope for the figures to be amended, thereby reducing the risk of errors arising. Software providers are in the process of developing API software solutions and a number of the larger software houses are now working to make these available to their licence holders.
In circumstances where the VAT return is compiled from more than one accounting package or where spreadsheets are used to calculate adjustments, eg for partial exemption purposes, it will be necessary to have digital links between the packages and/or spreadsheets to ensure that information flows automatically to HMRC via the API links.
Whilst all affected businesses will be mandatorily required to submit the information that currently makes up the nine boxes on the VAT return digitally, they will also be required to retain supplementary information digitally. This includes recording all sales and purchases at a transactional level, together with a summary of all VAT adjustments and a breakdown of supplies made at different VAT liabilities, and identifying, on an invoice -by-invoice basis, VAT that is only partially recoverable. Whilst businesses are not obliged to submit this supplementary data, HMRC has stated that where organisations submit this data voluntarily, it will take this into account in determining whether or not to undertake a compliance visit; the inference being that those businesses that choose to only submit the mandatory data may be regarded as being in some way less compliant.
Preparing for MTD
HMRC has recognised that businesses may want to embrace MTD before 1 April 2019 to ensure that they are compliant from this date. To assist with this, HMRC is running an MTD pilot programme from 1 April 2018. Initially this pilot is restricted to a limited number of businesses with a straightforward VAT profile, with those businesses with more complex VAT accounting being able to participate in the pilot later in the year. HMRC has confirmed that it will adopt a light touch to compliance failures for the first 12 months and will not seek to levy penalties arising from digital submission errors.
The changes under MTD will provide HMRC with more information and a better understanding of the risk profile of businesses. Accordingly, in preparing for MTD, businesses should take the opportunity to review their VAT accounting processes and procedures with a view to minimising the risk of errors arising in the future.
For more information please get in touch with John Forth, or your usual RSM contact.