Making Tax Digital (MTD alert #697)
Our man Neil has written this update on MTD and we felt in only right that we should share it with you all;
MTD for VAT: a summary of the published position as understood in August 2018
With the postponement of the introduction of MTD for all other taxes, VAT suddenly found itself in the vanguard where MTD is concerned. In mid-July 2018, HMRC published some reasonably detailed guidance, replacing the rather sketchy information available until then. There are two documents concerned, “VAT Notice 700/22: Making Tax Digital for VAT”, and “Making Tax Digital for Business – stakeholder communications pack” (which also contains some reference to MTD for Income Tax).
To clear up a few initial points, despite the essential quarterly nature of MTD for other taxes (when it finally comes in), MTD for VAT will continue to allow for monthly VAT returns, annual VAT returns and nonstandard VAT periods. Seven-day extension for submission and payment will also continue, but is likely to be withdrawn at some future date, possibly when MTD is extended, so that there is consistency of deadlines. MTD will also accommodate businesses using the flat rate scheme, although many smaller FRS users will not be liable to implement MTD.
Whilst the headline introductory date is 1 April 2019, this actually means, for any affected taxpayer, with effect from the beginning of the first VAT period commencing on or after that day.
The principles of MTD are essentially threefold. One element is the digital retention of records, another the maintenance of digital links between all parts of the accounting system giving rise to the final VAT return data, and, finally, the direct digital submission from the accounting system of VAT returns into HMRC’s systems. It is important to think of these three aspects as distinct from each other, since only two will become compulsory from the outset, namely the digital retention of records and the digital submission of VAT return data. The elimination of non-digital links between different accounting systems or different parts of a single accounting system does not become not mandatory until 1 April 2020.
Liability to MTD
All businesses with a taxable turnover above the VAT registration threshold will be required to use MTD compatible software with effect from the introductory date. Businesses trading below the VAT threshold will not be required to submit VAT figures to HMRC by way of MTD, and the existing portal will therefore remain open for use by businesses in such a situation. Subject to HMRC’s acceptance, there are exemptions for those with a religious objection to the use of computers, for those for whom it is not reasonably practicable to use digital tools for reasons of age, disability, remoteness of location or any other reason, and for those subject to an insolvency procedure.
Where a business is VAT-registered but trading below the VAT threshold (nearly half of all VAT registrations in the UK) they will not be required to participate in MTD unless and until they exceed the threshold, on an historical basis. Once the threshold has been exceeded and MTD implemented, there is no way back – if turnover drops below the threshold, the new obligations remain (unless of course the business deregisters). For those who do breach the threshold whilst VAT-registered, the liability to MTD commences from the beginning of their first VAT period following the month in which the level was exceeded. For example, if a business on calendar quarterly VAT returns exceeds on a rolling twelvemonth basis £85,000 taxable turnover (or any revised figure by then relevant) in July 2020, their liability to MTD commences on 1 October 2020.
Businesses not liable to use MTD may opt to do so, and such businesses, if they remain below the VAT threshold, may opt back out again later. It is suggested that no-one who is not liable to MTD for VAT is likely to benefit from opting in, however!
Since the test for compulsory participation in MTD for VAT is based on taxable turnover, it will be important for businesses with exempt turnover, or turnover outside the scope of UK VAT, to take this into account when determining their liability to implement MTD. A consultancy business with an annual turnover of £150,000, for example, where £80,000 is derived from supplies to overseas businesses, will have a taxable turnover in UK terms of only £70,000 and therefore will not need to abide by the new rules. Likewise, a small farm with £100,000 gross annual turnover (£50,000 crop or livestock sales and £50,000 residential let property rental) will not be liable for MTD. It is not yet clear how HMRC will monitor this, although the public notice confirms the basic position in this regard.
For any VAT-registered business, taxable turnover is measured net of VAT, meaning that FRS businesses may deduct the VAT charged to customers from the gross turnover figure used in the flat rate calculation when determining their liability to MTD for VAT.
Since the threshold is based on a rolling historical turnover basis, intending traders (those who have registered in advance of actually making taxable supplies) will not be required to comply with the provisions of MTD for VAT until they have begun to make sales. It follows that many property development businesses, for example, even where the value of any given project runs into many millions and where there is a very long lead time to sales, will not be required to implement MTD until after they commence making sales when the development is complete or close to completion, on account of having zero taxable turnover for many months or even some years.
Digital Retention of Records
Records which must be maintained digitally for the purpose of MTD, according to HMRC, are as follows:
- Your business name
- The address of your principal place of business
- Your VAT registration number
- A record of any VAT accounting schemes that you use For each supply you make you must record;
- The time of supply
- The value of the supply
- The rate of VAT charged If you make multiple supplies at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice or receipt that have the same time of supply and rate of VAT charged. You must also have a record of;
- Outputs value for the period split between standard rate, reduced rate, zero rate,
- Exempt and outside the scope outputs. For each supply you receive you must record;
- The time of supply
- The value of the supply including any VAT that is not claimable by you
- The amount of input tax that you will claim.
If more than one supply is on an invoice you can record the totals from the invoice.
Retailers are required to maintain a digital record of Daily Gross Takings (as defined for VAT already), but not of each individual transaction adding up to the total. Amongst other things, this means that an EPOS till system does not have to link digitally with the main accounting system; daily figures may be manually input into the latter.
Any records not mentioned in HMRC’s list above do not need to be digitally maintained. This includes detailed computations, such as partial exemption calculations and other data (HMRC give the example of a register of company cars maintained for fuel scale charge purposes). However, any journal required to give effect to an adjustment of this kind will now need to be made before the return is submitted, rather than being input after the event.
MTD requires that all businesses liable to participate maintain electronic records. That is to say, manual only record-keeping will no longer be permissible, as a matter of law. Spreadsheets are regarded as digital records for the purpose of the regulations, but will still require some form of bridge to HMRC’s systems.
There is no requirement to issue invoices electronically, nor to process them electronically. Each invoice can be an item of prime (manual) entry into the digital accounting system.
Importantly, HMRC have acknowledged a real difficulty that had been pointed out to them during the consultation process on MTD for VAT. This appertains to the situation where an agent is involved in arranging transactions on behalf of their principal, who is the VAT-registered person. Quite often agents of this kind (letting agents for rented property being the most common but far from the only example) produce for their client a summary record of all transactions arranged for them. This record may or may not have been compiled in some form of software – spreadsheet or otherwise – which it would be difficult if not impossible to link electronically with the principal’s own accounting software or with the records maintained by another agent also acting for the same principal in respect of their VAT obligations. In these circumstances, the summary figures from the agent’s report may be entered directly into the digital records of the principal as a single entry – there is no need to enter each transaction arranged by the agent individually into the digitised accounting records.
From the point of prime entry, whether that entry is an invoice or the result of some form of specialised calculation, at the latest from the 2020 implementation date for this aspect of MTD for VAT, all links between any parts of the accounting system must be digital right up to the point where the figures are digitally and automatically input into HMRC’s systems. The deferral of the deadline for this element of MTD for VAT to 1 April 2020 (presumably first VAT return starting on or after that date) is a welcome relaxation for businesses which have multiple accounting systems, since they will be able to take more time to consider how to link them all digitally. Manual extraction of figures into a summary document (e.g. a spreadsheet) will remain permissible for a year after the rest of MTD for VAT becomes obligatory. This relaxation does not extend to the manner in which the return figures are submitted to HMRC from the summary document – this link must be digital, as described below.
Every link between any parts of the accounting system, or between different accounting packages, or between pages in an electronic spreadsheet, will have to be “digital”. If data is transferred from one form of digital records to another (totals from one spreadsheet need to be entered in another spreadsheet, for example), there must be a digital link between the two. It will not be permissible to copy a figure manually from one to the other. From the point of prime entry (invoice, journal, etc) to the submission of the return figures to HMRC, there must be no manual intervention of any kind. Noting a figure from one digital source and recording it manually in another digital record is not permissible.
Given the centrality of this concept of “digital link”, it is ironic, to say the least, that there is nowhere in the legislation of guidance any definition of the term. HMRC regard the use of the “copy and paste” function (which they persist in calling “cut and paste”) as not being a digital link. This surely must be debatable.
It is this aspect of MTD for VAT that will be most problematic for larger businesses which use multiple accounting systems, for VAT groups, for academy schools and for other enterprises which have a need to collate information from a number of sources in order to arrive at the relevant totals for inclusion on the VAT return. Often a spreadsheet is used for this summary exercise, meaning also that software to link the spreadsheet to HMRC’s systems will be required – this element, as stated above, not being deferred beyond 2019.
Digital Submission of Returns
The final link in this digital chain (or “customer journey” as HMRC have dubbed it), must be the submission of the data to HMRC. The old interface for submission of VAT returns will not be available for those liable to MTD (although it will remain for those not liable, which, as mentioned above, includes the 44% of UK VAT-registered businesses which are trading below the threshold).
This piece of software (the bridge between a taxpayer’s records and HMRC’s systems, or API, standing for Application Program Interface) must be capable of both transferring data to HMRC and receiving certain data back, such as details of the next VAT return period. Only packages approved by HMRC will be permitted.
The data that this link is required to transfer to HMRC is no more than the data already submitted through the existing arrangements, that is to say, the figures for the same nine boxes. Depending on any Brexit transitional arrangements or lack of them, the number of boxes may even reduce by the time MTD is introduced. It may be that HMRC’s longer term intention is to increase the level of detail required to be submitted digitally, so that ultimately they can carry out analytical checks of VAT records without the need to visit or request accounting records to be sent to them, although there has been nothing published to this effect and it is likely to be some years away if it happens at all.
There will however be from the outset an option to submit more information than is mandatory, and even to correct information previously supplied which turns out to require amendment in the light of events, but it would seem unlikely that anyone would wish to take advantage of this facility.
Until July 2018, when the new VAT notice and stakeholder information pack were published by HMRC, accompanied by a third document entitled “Software suppliers supporting Making Tax Digital for VAT”, there was still no indication of what software might be available to transfer figures from spreadsheets into HMRC’s systems. HMRC have long had a register of interested parties whom they have been keeping informed on the protocols being developed (they talk about such software providers as being “in the sandbox”), and have now provided details of a number of potential producers of suitable software.
Some of these suppliers are software houses which sell accounting packages (Sage, QuickBooks, Iris, Xero, Farmplan) who will presumably embed the submission software into their existing products. Others are less well-known, and direct contact with them will be necessary to establish the functionality and cost of their products, and capability to convert spreadsheet data into HMRC’s required format, which will be the prime need of many users.
MTD for VAT and Agents
Agents submitting returns for clients will also be required to have software which enables this to happen, and which ensures that any data sent to them by their clients can be transferred digitally from one format to another for onward submission to HMRC.
Doubtless, many agents will encourage their clients to use their chosen standardised accounting package, to which they also can have online access, in order to simplify the process of transitioning to MTD for VAT. Others may wish to act as an interface between their clients and HMRC, in which case they will, according to HMRC, need to “create a new Agent Services account”, to which they can then “link existing client relationships”, allowing those relationships “to be recognised by the new digital services”. This will be compatible with MTD for other taxes when that is introduced in 2020 or later. This approach is likely to be essential for any practice which maintains the client’s records using an accounting package, as opposed to having access to the client’s own software product.
As is often the case, HMRC initially indicated that they would go easy on penalties for the first year or so of the new arrangements. On this occasion, they called this a “soft landing”. However, not only did this relaxation only ever apply to the failure to ensure that digital links exist at every stage in the chain, it is also now clear that it really refers to the deferral by a year of this mandatory aspect of MTD. Thus there is no published intention to have any form of concession as regards penalties at all. It has always been the case that the default surcharge will still apply for late payment of VAT return liabilities, and HMRC will be able to call on existing penalties for failure to keep records, which presumably could be used in cases where businesses fail altogether to maintain digital records, as the law will in due course require.
The eventual aim, as regards adherence with the submission to HMRC of data, appears to be to have a penalty regime which applies across all taxes for MTD. Rather like motoring offences, it seems that points will be attributed to late submissions and a penalty levied when a certain threshold is exceeded, whilst points will be extinguished after a given period of full compliance. This is some time away, however.
Neil Owen Director, VAT Advisory Services Limited Worting House, Church Lane, Basingstoke, Hants RG23 8PX © Neil Owen, 2018 This note is intended as general guidance only and should not be taken as direct advice to any person.