Making Tax Digital for VAT

VAT is going digital and it could create all sorts of challenges for anyone who is VAT registered. Are you ready for the change?

One of the defining features of this government has been their enthusiasm for making anything and everything digital. From their ambition to create a ‘paperless NHS’ to their plans to ‘make tax digital’, they see the future as lying very much in the digital world. VAT is will be at the vanguard. While digital submission is available and optional for income tax, it will become mandatory for VAT from next April. While this could make things cheaper and simpler for everyone in the long run, it will create challenges.

Going digital

Back in July 2017, the Government announced that making tax digital for VAT would come into effect from April 2019. This means that any business over the VAT threshold – which currently stands at £85,000 – will have to keep its records in a format which is digitally linked (for VAT purposes only) and ensure they can return that information to HMRC via making tax digital (MTD) compatible software.

Digitally linked, for the HMRC’s purposes, refers to a world in which the electronic transfer of data and records can happen automatically between software programmes without human involvement. Businesses will need to record the time of supply for each transaction, VAT exclusive value, the rate of VAT charges or input tax to be claimed.

They also confirmed they will be making MTD available for other businesses on a voluntary basis for income tax as well as VAT. There are many reasons you might want to do this. Keeping records digitally can be cheaper and less time-consuming and avoids messing about with lots of paperwork. You may well be able to automate many of the reporting processes which might previously have taken up much of your working day.

If you have the right digital taxation software, you’ll be able to manage all your tax liabilities in the same place, have a real-time view of what you owe to HMRC or if they owe you a refund. It’s faster, more transparent and easier, but only if you’re set up for it.

At the same time, this may also create a number of challenges. Already HMRC has pushed the April deadline back for some organisations with more complex VAT considerations. These include:

1. Businesses meeting one of these three VAT profiles.
   1. • VAT group registration.
      • Divisional VAT registration.
      • A business which has to make payments on account.
      • Those companies which use the annual accounting scheme.
2. Unincorporated charities and trusts.
3. Local authorities and some public sector entities.
4. Public corporations.
5. Any overseas business, which is registered for VAT in the UK, but does not have an established UK office.

They’ve also recognised that businesses may need to adjust as they go from a system of keeping paper records which are then manually inputted into HMRC’s portal to one in which records are transferred from your system to HMRC. During this time, cut and paste may still be used to move the records from one system to the other. From April 2020, though, HMRC will expect these to be moved digitally.

For that, businesses will have to ensure they have updated to a functionally compatible piece of software, which can connect to the HMRC system via an application programming interface (API). These will have to capture more information than most businesses currently record which could mean significant investment in new IT infrastructure. That move could be a challenge for smaller organisations who are registered for VAT.

The timing is also important. As things stand, the transition to MTD will come in April at a time when the UK will have just exited the EU. Admittedly, there is still a great deal we do not know about Brexit – such as whether there will be a transition period, what deal will be implemented and, indeed, if Brexit will even happen at all. Even so, this will only add to uncertainties surrounding any technical changes to taxation and reporting rules.

As well as coming to terms with this new digital environment, therefore, companies will also be forced to consider the changing economic and regulatory landscape thanks to the UK’s exit from the EU. All in all, it will make for an extremely challenging period over March and April and it will help to have expert support to ensure they keep up with evolving requirements.  

Shifting to new software

The move to more advanced, functionally compatible, software will be difficult. For example, spreadsheet users will need bridging software or API enabled spreadsheets to submit the VAT return to HMRC. For this you will need to find a software developer which can provide a compatible and effective solution.

You will also need to understand issues such as exemptions. The Government has provided a list of people who will be exempt from the new requirements which includes people who are digitally excluded, disabled or who would struggle to comply with the new rules due to their religious beliefs.

The new rules have more onerous requirements for the content of digital records. Most businesses and contractors will not be able to capture this level of detail. They will need to upgrade their own capacities or use a third-party vendor to ensure they can capture all the details HMRC wants from them.

All of this will come with costs in terms of time, money and effort. Any business or contractor who does not currently have access to the right software will need to upgrade.

They will have to change their practices and the way they keep records. This may include developing sophisticated bespoke platforms and services, which is why many will be looking to third party providers. As well as providing all the software the company needs, they will also supply the expertise, infrastructure and support you need to ensure the change is as seamless as possible.