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    Thursday 23 May 2019

    Making tax digital – New UK VAT compliance requirements to be introduced from April 2019

    HM Revenue & Customs brickMaking Tax Digital (MTD) is HM Revenue & Customs’ (HMRC’s) strategy to modernise the UK tax system. As well as improving HMRC’s own internal systems, MTD involves mandatory digital record keeping and reporting by taxpayers.

    What is making tax digital for VAT?

    MTD can be broken down into two key requirements:

    • To use MTD-compatible software to report VAT data on a VAT return period basis and receive information from HMRC, using an Application Programming Interface (API) ; and
    • To maintain digital records to provide a complete digital audit trail to support UK VAT returns.

    MTD will not change the UK VAT rules nor the current submission and payment deadlines. However, the requirements will change how VAT returns are compiled and submitted to HMRC.

    First requirement: API submission

    Currently, over 90% of businesses submit their VAT returns using the HMRC online portal. Where MTD is mandatory, the online portal will no longer be available and API enabled software will be required to submit VAT return data.

    Second requirement: Keeping digital records & digital audit trail

    Under MTD, the following records must be kept in a digital format:

    • Business name
    • Principal place of business address
    • VAT registration number
    • Any VAT accounting schemes used
    • Regarding supplies made:
    • Time of supply
    • Value of the supply (net)
    • Rate of VAT charged
    • Regarding supplies received:
    • Time of supply
    •  Value of the supply
    • Amount of input tax that will be claimed
    • All other VAT account data

    The majority of this information is likely already kept by VAT registered businesses. However, this data must now be stored electronically, although not necessarily all in one piece of software.

    It should be noted that the above data will not be sent to HMRC as part of the VAT return submission, the same 9 box return will remain.

    HMRC’s main aim for MTD is to remove all instances of manual intervention in the VAT return preparation process. Therefore, links between software packages in the VAT preparation process must be digitally linked and all spreadsheets used should be formula driven. Manually entering adjustments and copying and pasting data will not be permitted.

    HMRC recognise that this is the most complex element of MTD, and therefore there will be a 12 month ‘soft landing’ (i.e. reduced penalties for non-compliance) for businesses still in the process of establishing digital links.

    Who is affected and when?

    MTD is required for any compulsorily UK VAT-registered entity, this includes UK businesses with a taxable turnover of over £85,000 or any business that does not have a UK establishment that makes supplies subject to UK VAT (potentially with no threshold).

    For most businesses, MTD compliant VAT returns will need to be submitted for all VAT periods commencing on or after 1 April 2019.

    However, for certain businesses there will be a six month extension to 1 October 2019. Most notably this six month deferral will apply to businesses that are established outside the UK, VAT groups and those making ‘payments on account’.

    How to prepare for MTD?

    To remain compliant, businesses will need to purchase API enabled software to submit their UK VAT returns.

    Every business is different and will each have different systems and processes in place. There are a number of MTD compliant software packages on the market, however, it is important to choose a product that will be a good fit for the existing system infrastructure.

    Businesses will also need to review their processes for UK VAT return preparation to identify and remove instances of manual intervention, such that a digital audit trail is maintained. To date, many businesses are seeking help to review and map out their existing and proposed processes, providing MTD gap analysis assessments and making introductions to our network specialising in tax technologies. A key message to businesses affected by MTD is to plan ahead to allow sufficient time to implement new systems.

    Contributor: 

    Sunil Parmar – Director, VAT
    Smith & Williamson, London, UK
    E: Sunil.Parmar@smithandwilliamson.com

    Sophie Bateman – Manager, VAT
    Smith & Williamson, London, UK
    E: Sophie.Bateman @smithandwilliamson.com

    Making Tax Digital (MTD) is HM Revenue & Customs’ (HMRC’s) strategy to modernise the UK tax system. As well as improving HMRC’s own internal systems, MTD involves mandatory digital record keeping and reporting by taxpayers.
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