Most UK VAT-registered organisations should, by now, have begun to account for VAT in compliance with the making tax digital for VAT (MTDfV) rules. However, HMRC has allowed a minority of organisations, referred to collectively as ‘complex’ organisations, a six-month extension. Complex organisations should have received a letter confirming their deferral to the first VAT period beginning on or after 1 October 2019.
HMRC’s published guidance states that complex organisations for these purposes include: trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, those public sector entities required to provide additional information on their VAT return, local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users. However, it is important to remember that only VAT registered organisations whose taxable turnover is more than £85,000 are required to sign-up to MTDfV. If your business is operating below the VAT registration threshold the MTDfV regime is optional.
As a reminder, at a high level, there are three main MTDfV requirements:
Digital record keeping
Preserving certain records and accounts within ‘functional compatible software’, which means a software program (or programs), although this can include electronic spreadsheets such as Excel.
Creating and maintaining digital links for data transfer between software programs, ensuring a fully linked digital audit trail between the digital records and the VAT return submission. A digital link includes data exported from an accounting system into an electronic spreadsheet and formulae within the spreadsheet that ‘pull-through’ figures. However, ‘copy and paste’ and hard-coding figures are not valid digital links.
The VAT return submission must be made via an application programming interface (API) – in practice this means submitting the VAT return through an API-enabled software tool.
Registration and submission – software tools
Registration for MTDfV is not automatic, so organisations need to register at the correct time. Once registered any current outstanding and future VAT returns must be filed under MTDfV rules. The API submission requirement will either be built into an existing accounting package where spreadsheets are not used to undertake the necessary calculations or via ‘bridging’ software. An API-enabled spreadsheet software tool is an inexpensive bridging solution for submission of VAT returns and RSM has released an API-enabled spreadsheet solution, RSM Making Tax Digital for VAT, that facilitates easy, cost-effective VAT return submission if required.
Digital links – soft-landing period
The more challenging part of the MTDfV changes is often associated with the digital links requirement, as many organisations must interrogate several data sources which may not be compatible with API technology to compile the VAT return figures. In recognition of this challenge, HMRC has for some time allowed a 12-month extension to the MTDfV deadline to introduce these changes (i.e. 1 April 2020 for most organisations and 1 October 2020 for complex organisations).
Digital links – additional time available for some
Despite this extension, it is evident that the challenges associated with the proper implementation of digital links is too difficult for some organisations. In response to this, HMRC has announced that those with ‘complex or legacy IT systems’ which cannot be adapted in time can apply for an extension to put the necessary digital links in place. However, HMRC’s guidance suggests that applications may be challenged and states that ‘cost alone is not sufficient reason to issue a specific direction’.
Although MTDfV is likely to take time to implement and may well involve additional cost, many organisations are using the opportunity to review their VAT return process to identify efficiencies and to ensure it is completed in the most efficient way instead of following historic and legacy processes.
For more information on implementing MTDfV and reviewing your VAT return processes, please get in touch with Tom Gilbert.