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Industry issue:

Making Tax Digital – Are you ready?

24 August 2018

From 1 April 2019, a new online filing requirement will change the way businesses maintain VAT records, and prepare and submit VAT returns.  

Background

With the introduction of new rules for Making Tax Digital (MTD), businesses will be compelled to transition to a modern, streamlined system of keeping their tax records and providing information to HMRC. This is a first-step towards a long term goal of requiring real time filing of individual transactions with HMRC.  On 1 April 2019, the rules take effect only for VAT. However, there are plans to roll it out for other taxes in the future.
 

New requirements

Under MTD, businesses will be required to maintain digital records and submit VAT returns using special software (called the Application Programming Interface or API). The relevant VAT return data should be digitally linked so that transaction can be traced from source (i.e. purchase/sales ledger) through to VAT return completion.   
 

Does it affect all companies?

The new rules will apply to any business that has a compulsory requirement to register for UK VAT.  This typically covers any business with UK turnover in excess of the VAT registration threshold (currently, £85,000). It also applies to UK businesses buying goods and services from overseas in excess of this threshold.
 

Increased scrutiny for the Natural Resources & Energy sector?

Over the recent years, the Natural Resources & Energy sector has been subject to heavy scrutiny by HMRC. Where Natural Resources & Energy companies have been unable to demonstrate that they satisfy the business tests for VAT purposes, HMRC has been clawing back input tax recoveries and cancelling VAT registrations. With the roll out of MTD, it highlights these companies’ VAT profile and heavily emphasises the need for Natural Resources & Energy companies to review the appropriateness of their existing business model and transfer pricing.  
 

Action required

As April 2019 is drawing closer, businesses should start thinking about how MTD will affect them.  This includes:

  • Ensuring the accounting records are fit for purpose and are MTD-compliant
  • Considering the robustness of the VAT policies and practices that will form the back-bone of the digital records 

For any queries, please contact Aditi Hyett or your usual VAT adviser. Please click here for further information on MTD.