Making Tax Digital - the story continues
Most people who read AW now have some practical experience of MTD for VAT.
However, there are still quite a few people who don't. Hence I will write this on the assumption that the reader is relatively new to the subject, but understands about submitting VAT returns through the gateway.
The basic principles that VAT numbers do not change and that the gateway accounts remain with the same user ID and password are now quite widely known. To join MTD an application has to be made. This can be done (as at today) from this link.
MTD requires third-party software that can be used to submit VAT returns. There is also now a searchable database available from HMRC about what software is available.
As it stands the searchable database does not help that much as it does not distinguish, for example, between bridging suppliers that use Excel and those which can use Open Office, Apple Numbers or Google Sheets. There are, however, a substantial number of bridging suppliers who are offering free introductory services although as it stands I don't think many are offering a free service that extends beyond the 2019 calendar year. Taxpayers, therefore, face a challenge as those providers that are offering a free service are also not advertising that much.
The rules are also quite clear for MTD. They are to be found in VAT notice 700/22.
It is compulsory for an organisation which has a taxable turnover (excluding VAT) of over 85,000 based upon the previous 12 months turnover. Other organisations can join up voluntarily (that's about 1 million who must join and another million or so who can if they wish).
There are two elements to MTD. The keeping of digital records and the submission of data through an API (Applications Programming Interface).
The VAT API involves sending the same nine boxes of information that are currently sent through the gateway. There may at some stage be supplementary data that can be sent, but I understand this to be details of adjustments rather than the detailed record of invoices that is used in Poland and Italy under SAF-T (Standard Audit File – Taxation a creature of the OECD). I have seen no proposals for the UK to require SAF-T data.
The process of joining MTD to send the vat return through the API is not just clicking a button. It takes a couple of days at least to process by HMRC. If the taxpayer is paying via direct debit it is slightly complicated in that at the moment the application must go through at least 3 weeks before the filing date and a week after the filing date.
My recommendation is that people who want to join MTD do so just over a week after their last filing date (normally people submit before the filing date which is the last date for filing – roughly the end of the first week in the second month after the end of the period).
Normally when people who are paying by direct get into MTD the direct debit still works although there is a report of one case where the direct debit has disappeared. There can also be some situations where the gateway still allows you to submit via the gateway when you have joined MTD. You should not do this. When a legal entity (business) joins MTD the data is transferred from one database to another. Hence if people then submit via the old gateway the information will be procedurally lost. HMRC will then write a letter asking for the legal entity to send the vat return via MTD. It is unlikely that the direct debit will be charged twice, but people should keep an eye out for this. As at today none of my clients have been penalised for delays as a result of submitting via the wrong system. I have only had one such case anyway.
Some taxpayers have managed to submit MTD returns for the wrong period. That arises from the Obligations API giving details of all obligations (periods for which a vat return is required) regardless of whether or not they have actually ended. Some API software prevents people from submitting vat returns for periods that have not ended, but at least one of the bigger software companies (cloud accounting) has allowed this to happen. HMRC will soon (in about a week) change their system to prevent vat returns from being submitted for periods which have not yet ended. In the meantime, however, be careful.
Readers who are aficionados of Catch 22-type contradictions may have noticed in my comments above that if a monthly submitting legal entity has a direct debit entry (not necessarily that common as many are repayment accounts) and that they have to make an application 3 (working) weeks and 2 days before the filing date and 1 week after the filing date that this can be a bit of a timing challenge particularly in months with less than 31 days . This has not escaped HMRC and they are planning on reducing the purdah period prior to filing during which it is not possible to switch, hopefully to 1 week, but this does depend substantially on the banks. This, however, remains an issue to be sensitive to and it is still 3 weeks at the moment.
The process of “open authorization” or Oauth2 is now something also that people are getting more experience with.
The idea of Oauth2 is to enable a third party to have limited rights on behalf of a legal entity (taxpayer). Hence using Oauth2 a legal entity can authorise one company to send in their vat return and another company to send in their income tax return. (if the legal entity is a human being).
One of the complications of MTD is that you can authorise your gateway to give authority for the read:vat and write:vat scopes even if you have not actually joined MTD. What will happen, however, is that the APIs won't work although the Oauth processes will appear to have worked. What I do is to authorise also the “hello” scope and use that to test the authorisation. If that works and the read and write scopes don't work then the legal entity has not joined MTD.
The solution, of course, is to join MTD. However, this also can cause a certain amount of confusion. To join MTD you need to:
a) Apply to join (see above)
b) Get some third party software (probably using a website in some way, or a cloud provider)
c) Use Oauth and your gateway to authorise the third party software to send your vat return.
It is important to note that people cannot join MTD merely by going on a third party website.
When it works it works well, but the issues I have mentioned above do cause some difficulties for some people and because it is new not all the people on helplines understand what needs to be done.
What I have written about so far is really the technical aspects of sending a vat return via an API to HMRC. There is, of course, additionally the digital record keeping.
This is an area where there remains some uncertainty as to for example whether you can use excel to draft an invoice without it digitally linking to the vat accounts. I have raised this issue with HMRC policy, but not yet had a response.
It remains, however, that an important part of MTD which won't be enforced fully until 2020 is the need to have digital records and also a digital link between those records. That can be as simple as a cell reference in a spreadsheet. (or nine) When I have implemented MTD with my clients we have gone through the process of ensuring that there are digital links. Although in theory, it is possible to have a final spreadsheet into which the figures are typed which is then bridged into MTD until April 2020, it is better to aim to get the processes right for the long term.
There are many ways in which it is possible to keep digital records as to vat input and output. I do think it is possible to handle these including the submission in a cloud spreadsheet updated on a mobile phone (smart phone). However, although I have handled a submission from a mobile phone I have not as yet dealt with someone who has handled everything on a mobile phone. It should also be possible to keep a local spreadsheet in a mobile and submit from that (for people with limited net access)
The issue of the need to keep digital records and having digital links is something that will take some time to resolve. I expect HMRC to concentrate from an enforcement perspective on nudging people into using the APIs to start out with. I don't think the requirement for digital recording will be the top priority. However, I still recommend that people aim to resolve everything at the same time. It isn't that difficult.
MTD for VAT is not the end of MTD. In many ways, it is the first step. MTD for IT (Income Tax) has had a live pilot scheme for longer than VAT. This, however, is substantially more complex because it involves changing from submitting an annual self assessment return. MTD for VAT has 5 APIs. Income Tax is around ten times as many APIs. I have just counted the ones in my source code and I find 44, but I think there are a few more in the pipeline. Income tax also involves submitting tax information on a quarterly basis. The pilot at the moment only includes people with a relatively simple income structure.
Corporation Tax is also scheduled for MTD. However, I am not aware of any details of the specifications for this. That being the case I would not expect Corporation Tax to be implemented for some time.
Another API that is being developed that may interest agents is the agents API. Many agents are getting used to the Agents Services Account. The Agents API has a number of functions that enable clients to appoint agents to act for them electronically.
The way it works is that an agent can electronically issue an invitation to a client to act for them. This is done either for income tax or VAT by sending a message to HMRC (an API call) involving either the National Insurance number or the VAT number and some fixed information about the client. It does not involve using the client's gateway number.
The client then gets an internet link (URL) from the agent that allows them to confirm that they wish that firm of accountants or bookkeepers to act for them dealing with the specific tax referred to. They use their gateway account to confirm that they are happy for this relationship to be established.
Potentially a firm of accountants could have an online sign up system for new clients whereby the clients give the accountants information via the accountants website and the accountants' website then generates the invitation electronically so that the client can establish the client-agent relationship automatically. Alternatively, however, this would be done by the accountants sending the link (via email or some other electronic messaging system) to the client.
This API is not, however, yet in a pilot scheme, it is only available to developers. It is, however, something I think that agents would find helpful in handling the tripartite agency relationship between themselves, their clients and HMRC.