The UK’s Making Tax Digital for VAT: What You Need to Know
By Simran Juneja, Consultant, Indirect Tax
Responding to business concerns about the pace of initiating its comprehensive Making Tax Digital (MTD) program, the UK government has extended the deadlines for the program’s rollout. Under the new timetable, beginning in April 2019, only businesses that owe VAT tax and have revenues of at least 85,000 pounds will need to start keeping digital records and using Making Tax Digital-compatible software to submit their VAT returns quarterly. Businesses will not be required to keep digital records for any other taxes until at least 2020.
Digitizing VAT is the first phase of the Making Tax Digital program, which is designed to modernize the tax system and reduce the 8 billion pounds in tax money lost each year from taxpayer errors during manual entry.
Businesses with revenue that falls below the VAT threshold may choose to start digitizing their records if they like. They should be aware that once they opt into Making Tax Digital for VAT, they will need to stay in the system.
Digital Record Keeping Requirements
Businesses are only required to maintain certain records in digital format. They may use more than one software program for them as long as the information can be digitally linked. The software must be able to connect with HMRC systems. A list of required digital records is below:
- Business name, address, VAT registration number and any special accounting schemes used
- VAT account information (this will be used by the software to fill out the return)
- Total of any adjustments (but not the calculations used to determine them)
- Time of supply, value of supply and rate of VAT charged on supplies made
- Time of supply and value of supply for purchases and the amount of input tax that will be claimed
- Total value of outputs for the period, broken down into the different VAT rates (standard, reduced, zero, exempt, outside the scope)
Businesses using a retail scheme must also record sales transaction data based on daily gross takings. Businesses using a flat rate scheme only need to record purchases relating to capital goods with a VAT inclusive value of 2,000 pounds or more.
Companies will need to preserve digital records for up to six years. Corrections to previous VAT returns can be submitted under the process currently used.
Digital Filing Requirements
Businesses must file quarterly VAT taxes digitally using HMRC-compatible software. Returns will contain the same nine boxes as usual. Companies may also submit supplementary information — for example, to explain differences from previous returns.
For further details on digital recordkeeping and submissions, visit the HMRC VAT web page.
Developing Compatible Software
Ninety-nine percent of companies already file their VAT returns online. But the vast majority do so by typing information onto the HMRC website. Just 12 percent file directly from a software program.
Under MTD for VAT, returns must be filed directly from software or from a digitally-enabled spreadsheet. The only exceptions are partial exemptions, error corrections and certain adjustments.
HMRC is currently working with third-party software developers to create a range of commercially-available VAT software options. Small-scale trials are underway and are supposed to be greatly expanded in April 2018. Whether software packages will be widely available before the filing deadline of April 2019 is an open question. To ease implementation, the government has promised businesses a “soft landing,” with no penalties applied for incorrect processing during the first year.
Britain is currently a member of the EU VAT area, so companies that bring goods from the EU to the UK do not pay import VAT charges at the border. Instead, they add the VAT charge to the price of the goods when they are sold to the final buyer.
But under current rules, after Britain leaves the UK, these goods presumably would be subject to import VAT payable at the border. Though importers would be refunded when the goods are sold to the final buyer, upfront payments could cause cash flow problems for some businesses.
UK retailers are lobbying the government to keep the UK in the EU VAT area under an arrangement similar to that of the Isle of Man, which is not an EU member, or Monaco, which also is not a member but has a customs agreement with France. But creating such an arrangement for the UK may not be possible. In January, the UK government pledged to "mitigate" potential damages to companies that need to pay VAT tax upfront.
The Making Tax Digital program is a huge undertaking that will take years to fully implement. As its first phase, the MTD for VAT program leaves some significant questions unanswered. But by promising not to assess penalties initially, as well as agreeing to delay other phases of MTD, the government is demonstrating patience and flexibility. Businesses must do the same as they move towards digitizing VAT records and experimenting with new software.