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Digital reporting and record keeping for VAT

15 September 2017

HMRC has now published a draft of the legislation that will implement Making Tax Digital (MTD) for VAT. This has been offered for consultation in advance of the planned introduction of the requirements on 1 April 2019.

MTD will apply to any VAT registered business with a turnover above the VAT threshold. The new legislation will give HMRC powers to require records to be kept and preserved digitally and to specify how businesses should do this.

HMRC says it will publish detailed regulations by April 2018, but the Winter Draft Finance Bill gives an outline of how MTD for VAT will operate:

  • Digital records will be required to include broadly the same information currently required by HMRC in VAT records. This will include; 
    • a VAT account linking primary records and the VAT return
    • information about which VAT accounting schemes are used (eg retail schemes, margin schemes, cash accounting and partial exemption)
    • records of error corrections and other adjustments
    • data from sales and purchase invoices. 
  • The new MTD system will keep the current deadlines for submitting VAT returns and repayments, at least until it is extended to cover income tax as well as VAT. Businesses may continue to submit returns monthly, under the annual accounting scheme or under non-standard tax periods.
  • HMRC says that businesses must use ‘functional compatible software’ to pull information from their digital records including, as a minimum, the nine boxes required for the VAT return. However, HMRC will encourage the voluntary submission of other information contained in the records to test the practicalities and potential benefits of this. It will also allow business to voluntarily submit data during the VAT period before the due date. 
  • HMRC says penalties for failure to keep or preserve digital records will correspond to HMRC’s existing record keeping penalties. As with the current rules on record retention, businesses will be required to retain their digital records for six years.
  • As expected, the draft law confirms that businesses trading below the VAT registration threshold (currently £85,000) will be exempt from keeping digital records. However, they can opt to use the MTD system on a voluntary basis. It is worth bearing in mind that a business subject to MTD whose turnover later drops below the VAT threshold must continue to keep digital records unless and until it cancels its VAT registration. VAT registered traders that are currently exempt from online filing will also be exempt from MTD. 

HMRC has invited stakeholders to submit comments on the draft legislation by email by 10 November 2017. 

HMRC’s postponement of MTD for income tax leaves VAT as a guinea pig for this ambitious new project. The proposals offered for consultation are broadly a digital equivalent of current VAT record keeping requirements and it looks like the initial challenge for businesses will be in the practicalities of setting up appropriate software. It remains to be seen whether HMRC and/or third party software providers have a suitable product that will be available by 2019.

HMRC also seems to be laying the foundations to increase the depth of information required once the system has bedded in. Taxpayers will have to wait for HMRC’s promised regulations for the finer details of the MTD requirements.

If you would like advice or guidance on how to manage to impact of the changes announced in the Winter Draft Finance Bill 2017 to 2018 please get in touch.

Read more on the Draft Finance Bill