The government are in the process of ‘digitising’ various tax compliance processes. This will require filing and storing associated backing information electronically. This process is dubbed Making Tax Digital (MTD).
VAT is the first tax to which this process will apply from April 2019, and the legislation surrounding this digitalisation is in the process of being issued.
Following on from HMRC’s high level overview of the provisions (detailed in my note of 6 December) draft legislation has been issued which is open to consultation. HMRC expect to have finished the consultation period and issued final legislation (which of course will be subject to the usual progress through the Houses of Parliament and Lords) before the start of the 2018/19 tax year.
What is required?
For VAT periods which begin after 1 April 2019 MTD for VAT will apply.
For such periods, businesses will be required to store information digitally and use this information to complete their VAT returns.
Storage of information and the corresponding VAT returns will need to be prepared and processed through third party software.
Who will be affected?
Business that have a VAT taxable turnover over the registration threshold (currently £85,000) for a VAT period starting after 1 April 2019 will be affected.
Turnover should be checked at the end of each month, if the registration threshold has been exceeded in the 12 months prior, the business will be subject to the MTD provisions from the start of the following month.
Where the above test is met, MTD for VAT will apply thereafter, even if turnover subsequently falls below this figure.
There are exemptions to MTD for VAT in the following circumstances:
Where a business is run entirely by members of a religious society the beliefs of which are incompatible with the MTD regulations.
It is not practical for the business to use digital tools – in situations where age, disability, location or any other reason make the taxpayer unable to comply.
The business is subject to an insolvency procedure.
Where a business meets one of the exemptions, an irrevocable election can be made to opt out of the exemption and apply the MTD regime should the taxpayer so wish.
What must be stored electronically?
Where a business is affected by the MTD for VAT regime, certain information must be stored electronically and used to complete VAT returns.
The draft legislation provides that the following information must be stored electronically:
Details of the VAT registered entity:
o The name and principal place of business for the taxable entity.
o VAT registration number.
o Any applicable schemes (Flat Rate for example).
For each accounting period:
o The time, value of any supplies made and the rate of VAT charged.
o The time, value and total input tax paid on taxable supplies purchased.
o A summary of the VAT exclusive outputs for each of Standard, reduced, zero rated, exempt and those that are outside the scope of VAT.
o Total output tax due for the period
o Total input tax for the period.
o There are be additional requirements where a scheme has been used or where there are cross border transactions.
Where there is a correction or adjustment:
o Details of the adjusted or corrected amount.
Where information is not required by statute, there is no requirement to provide it to HMRC. However, the legislation is prescriptive in that the listed information is required in it’s ‘raw’ form. It cannot be manually processed, for example by way of a summary spreadsheet.
MTD for VAT is facilitated through third party software that has been approved by HMRC. This communicates with HMRC and will allow the storing of information and the preparation of the applicable returns in an approved format.
HMRC are not themselves providing software to assist, so those affected will need to purchase appropriate third party software, and Ensors can help with this.
Agents are able to assist in completing the Returns as before.
What happens next?
The consultation period for the legislation runs to 9 February and thereafter HMRC aims to issue ‘final’ legislation before the start of the 2018/19 tax year.
Thereafter, the legislation will go through the usual approval process through the Houses of Commons and Lords prior to receiving Royal Assent, this normally happens in the Summer, however given the delays to this process last year and the impending Brexit, you could be forgiven for thinking that timescale was a bit ambitious!