VAT and making tax digital
The UK plans to introduce new digital filing and record keeping requirements for VAT. The new Making Tax Digital for VAT (MTD) regime will come into force on 1 April 2019 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 businesses based overseas, including those without a UK establishment.
MTD will require almost all UK VAT registered businesses to keep ‘digital records’ and file their VAT returns via ‘functional compatible software’. While MTD will change the manner in which UK VAT returns are submitted, it is not expected to alter the deadlines or the frequency of UK VAT return filings.
How will it work?
HMRC’s guidance is not yet finalised but, according to information currently available, MTD will introduce new VAT record keeping rules and the requirement that all applicable VAT return data is ‘digitally linked’ so that transactions can be traced from source data (i.e. purchase/sales ledger) through to VAT return completion and upload to HMRC. HMRC has allowed a ‘soft landing’ approach for certain aspects in the first year of MTD to give businesses extra time to become fully compliant with the new law. The requirement for a digital connection into the purchase and sales ledgers will not come into force until 1 April 2020.
What challenges will MTD for VAT bring?
The Application Programming Interface (API) software needed for the digital upload of UK VAT return figures to HMRC will not be provided free of charge by HMRC – instead it will be developed by third parties and will not be specifically endorsed or approved by HMRC. Software trials are currently underway and HMRC expects that a wide range of software products will be available to businesses from 1 April 2019. However, the 2019 implementation date does not give larger businesses with sizeable and complex accounting systems much time to adapt them to comply with the new law.
The 1 April 2019 implementation date for MTD also clashes with the expected date of Brexit (29 March 2019) which, depending on the outcome of negotiations between the UK and EU, could well necessitate its own major systems changes for VAT at the same time. Businesses that trade cross border could face the onerous task of dealing with the effects of MTD and Brexit simultaneously.
How should I prepare?
UK VAT registered businesses should review their 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 1 April 2020, businesses should be preparing their systems for full MTD compliance now.
The current focus of most businesses has been on identifying how they can share their data with HMRC in a manner that complies with the new rules. However, they should also consider precisely what data they will share with HMRC as a consequence of MTD, and the quality of that data.
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