HMRC has now extended its Making Tax Digital for VAT (MTDfV) software pilot to include VAT groups, trusts, unincorporated charities and VAT divisions and all businesses that are required to file their VAT returns under MTDfV with effect from 1 April 2019. It has also been confirmed that organisations for whom MTDfV has been deferred to 1 October 2019 need not comply with ‘digital links’ requirements until 1 October 2020. It is therefore crucial to check whether HMRC expects your business to start using MTDfV from 1 April or 1 October.
What is Making Tax Digital for VAT?
MTDfV introduces new digital filing and record keeping requirements for VAT and will be compulsory for all entities that are VAT registered in the UK and have an annual taxable turnover exceeding £85,000. This includes charities and businesses based overseas, even those without a UK establishment.
MTDfV will require almost all UK VAT registered businesses to keep ‘digital records’ and file their VAT returns via ‘functional compatible software’. Other European countries have already created or are planning similar systems for VAT, and it is anticipated that this is the first step in a long-term goal of requiring ‘real time filing’ of individual transactions with HMRC.
MTDfV introduces new the requirement that all applicable VAT return data is kept in a digital format and is ‘digitally linked’ so that transactions can be traced from source data (ie purchase/sales ledger) through to VAT return completion and upload to HMRC.
While MTDfV will change the manner in which VAT returns are submitted, it will not alter the deadlines or the frequency of VAT return filings.
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Digital links and digital records
HMRC says a ‘digital link’ is one where a transfer or exchange of data is made electronically between software programs, without the involvement or need for manual intervention (such as the copying over of information by hand or the manual transposition of data between two or more pieces of software). For example, a business may record sales and purchase transactions in its accounting system, transfer the totals to a spreadsheet in which it calculates the UK VAT return figures then send the information to bridging software, which submits the return to HMRC via an online portal. The new law requires these three pieces of software to be ‘digitally linked’.
Requirements for keeping digital records include recording for each transaction the time of supply, VAT exclusive value, the rate of VAT charges, or input tax to be claimed.
Read more on digital linking and record keeping. HMRC's detailed guidance is available in Notice 700/22.
When does MTDfV come into force?
Initially, VAT registered businesses must create a digital link between the software containing data for the VAT return boxes to the bridging software and HMRC’s MTDfV system. This requirement comes into force for VAT periods commencing on or after 1 April 2019.
However, HMRC wants to spend more time preparing its systems for organisations with more complex VAT affairs and has stated that mandatory filing under MTDfV will be deferred until 1 October 2019 for the following VAT registered entities:
- Trusts and unincorporated charities
- Local authorities and some public sector entities, including Government departments and NHS Trusts
- Public corporations
- Overseas businesses which are UK VAT registered but do not have an establishment in the UK
- Businesses with one or more of the following VAT profiles:
- VAT group registration
- Divisional VAT registration
- those required to make payments on account
- those who use the annual accounting scheme.
HMRC has recently written to businesses to notify them of their obligation to use MTDfV and confirm whether they fall into the April or October phases of the rollout. HMRC says that businesses who believe they fall into the October deferral list but have not yet received such a letter should contact HMRC’s VAT helpline immediately. This is because the letter contains a specific legal direction from HMRC authorising them to keep using the existing VAT portal after 1 April 2019.
The requirement for a digital connection into underlying records, such as purchase and sales ledgers, comes into force on 1 April 2020. HMRC has now confirmed that this deadline will be extended to 1 October 2020 for the more complex businesses listed above, so all MTDfV users have a 12 month ‘soft landing period’.
MTDfV software and HMRC’s pilot
The software needed for the digital upload of UK VAT return figures to HMRC will not be provided free of charge by HMRC – it is currently being developed by third party software providers under a pilot run by HMRC. HMRC has published a list of software products that are commercially available or in the testing process.
The software pilot was recently widened to allow more businesses to join and begin filing VAT returns under MTDfV before the official implementation date of 1 April 2019. However, organisations who fall into the more complex categories identified by HMRC (see list above) are not required to file under MTDfV until 1 October 2019, and HMRC is taking a phased approach to letting them join the pilot. From 12 February, VAT group registrations, trusts, unincorporated charities and VAT divisions are allowed to join the pilot (unless they also fall into one of the excluded categories).
How should businesses prepare for MTDfV?
MTDfV is a significant challenge for businesses as it introduces completely new technology for completing VAT returns over a relatively short period of time, during which many will also be making major system changes to prepare for Brexit. It will also be particularly difficult for larger businesses with sizeable and complex accounting systems to adapt them to comply with the requirement for full digital linkage by 2020.
This checklist will help businesses plan for compliance with MTDfV:
- Confirm the date on which MTDfV becomes mandatory for your organisation. Are you required to implement MTDfV on 1 April 2019 or are you on HMRC’s list of complex businesses for whom MTDfV is deferred until 1 October 2019? Has HMRC sent you a letter to confirm your start date?
- Review the software products on the market to consider which will best meet your needs to comply with the requirements to use bridging software to submit VAT returns under MTDfV from 2019. If you use commercial software to complete your VAT returns, ask your software provider how their product will be updated for MTDfV.
- Consider when and whether you should join HMRC’s pilot before MTDfV becomes mandatory, bearing in mind that once you have signed up to take part in the pilot, you must continue to use MTDfV to submit your VAT returns.
- Review your current accounting systems to map the VAT audit trail and identify areas where digital links will be required. While some digital links, such as transfers from non-API enabled systems to one or more spreadsheets may not be compulsory until 2020, businesses should start preparing their systems for full MTDfV compliance now.
- Consider precisely what data you will have to share with HMRC as a consequence of MTDfV, and review the quality of that data.
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How can BDO help?
BDO can help assess your business’s readiness for MTDfV, identifying any breaks in the digital journey, and work with your IT department to help you to implement the changes necessary to your accounting software to comply with the new law. We can also help you to identify the most suitable independent software package for making the digital upload to HMRC’s system and, if any aspect of MTDfV proves impractical or unduly onerous for your organisation, help you negotiate alternatives with HMRC. We can also assist with the creation of MTDfV-compliant VAT return spreadsheet templates.
BDO is also in contact with HMRC to monitor further developments on MTDfV so can keep you up to date with the latest news.