Making Tax Digital - the story continues

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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.

Replies (11)

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By GHarr497688
02nd Mar 2019 12:21

Thats a really good summary and you are a very helpful person. I have to say after reading the article one is left with a sense of dread. Sounds so complicated. I went into Accountancy not IT as a career. What are your thoughts on a lady who works for her husband who is 59 , English is not her first language - she completes a Collins Book and has done for 30 years - her Son kindly uses his computer but just for the Gateway figures ( the Lady does not want her family knowing all the finances ) . At the end of the year we do the Accounts from the manual books and then file on IRIS . The Lady is planning to retire in 5 years. NOW she will have to buy a computer , buy a software package and learn all about or learn how to use an excel spreadsheet and how the bridging software works and she will also have to keep her own manual records as it would be too involved for her to learn double entry book-keeping then in one or two years time she will have to learn how to complete full accounts to file each quarter so that her taxes are up to date. All this has to be on top of her existing duties of running a business - RTI - Auto enrolment - Health and Safety need I go on.......or for a substantial charge she can come to me and have it all done ! And Government say that MTD will make life easier and better control with less errors made . Lets hope they read this !

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Replying to GHarr497688:
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By johnhemming
02nd Mar 2019 12:55

What I am trying to do is to highlight the real issues people are encountering from time to time and explaining how to get over them. Some people have no problems at all. All they do is do what they are supposed to do in the order they are supposed to do it and when they are supposed to do it and it works. Life, however, is not always like that.

As far as your client is concerned and others who are doing things entirely manually the first question is how best to get the manual vat figures into some form of electronic form. If at the end if the year you are only using the totals then obviously doing things quarterly won't help. However, I would not think it is necessarily that difficult to get the figures into some electronic system. I don't know to what extent scanning the figures would do the job. I accept that scanning and using OCR software tends not to work well for handwriting, but in fact scanned images are digital records. It would be an interesting question as to whether if you prepare the digital records by taking a scan of the vat input and output registers and entering the total from them that this would be formally complaint. It isn't how one would expect things to work, but it would be possible to load an image with the total from that image.

Whichever way you look at this the best option might be for you to do the digital parts of this for them. A lot depends really on the number of transactions.

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Replying to johnhemming:
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By GHarr497688
02nd Mar 2019 13:11

The digital scanning would be amazing but where on earth is that software and with just a month to go maybe a delay to help the smallest entities who have now officially been notified would be a positive step forward rather than a hurried mess. HMRC and the IT companies have made a massive error in believing ALL clients take note of what the Accountant says. The general comment from a client is that they pay us too much already . I am the most proactive person you could wish to meet and I am able to encourage clients with excellent advice but generally clients will think we are trying to upset. HMRC live in a bubble and have no idea of the difficulty some Accountants face. I would suspect that without the small to medium Accountants the tax system could well collapse and that includes payroll as we are also expected to shoulder that burden. Computers work on data entered and that still has to come from a human being .

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Replying to GHarr497688:
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By johnhemming
02nd Mar 2019 13:35

GHarr497688 wrote:

The digital scanning would be amazing but where on earth is that software

Pretty well all smart phones have camera software which scans an image into pixels which are then kept as digital records.

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Replying to johnhemming:
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By johnhemming
02nd Mar 2019 14:19

Actually it probably is possible to interpret it as well using some of the more modern ML systems. That would require experimentation, but if you are interested in trying this out I am happy to do the experimentation.

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Replying to johnhemming:
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By GHarr497688
02nd Mar 2019 14:27

if I was able to take a picture of the collins book that then uploaded to a spread sheet then clearly my worry would be solved. Let me know :)

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Replying to GHarr497688:
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By johnhemming
02nd Mar 2019 15:05

It is pretty easy to add images to a spreadsheet. The question, of course, is the extent to which this resolves the issue.

I have just had a look at some of the handwriting analysis software and it is actually now quite good (I looked at Googles). Hence it should be possible to analyse the photograph so that no-one could really criticise this route of data entry.

I would still need to do some experimentation to be sure about this. If you can take some photographs of manual records and get them to me I can find out how good this would be likely to be.

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By dgilmour51
06th Mar 2019 12:18

My wife keeps the books for a small builder, manually, and has done so for the last 20 years. Last time she had a query at audit was 7 years ago.
However the reason she wants to stay with this is the allocation of purchases to jobs - often at a sub-line-item level, which is, at best, prodigious onerous even with COTS software 'designed' for builders [esp. with hand-written invoices].
And then, of course, there's the matter of maintaing the audit trail to sub-line allocation of materials if/when she's on the wrong side of CIS or new-build vs. maintenance.
Her manual book-keeping skills are so high and precise that even Excel could give her no advantage.
She is pretty certain that the MTD will infinitely increase the error-rate, resulting in back-working and disentanglement significantly eating into the available hours.

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Morph
By kevinringer
06th Mar 2019 16:00

Wow, what a burdensome process. I can see my IT-literate clients being challenged by it and I dread to think how my IT-illiterate clients will cope.

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By Smalltalk
07th Mar 2019 16:39

If one keeps a spreasheet with all the trasanctions and the mandatory, tax point, tax amount & rate, formulated which also have a summary for the income /expenditures; then email the accountant, could accountant manipulate the spreadsheet by adding codes (as most accountancy software do coding) without changing the tax point, value & rate, and then importing it into their software for submitting the vat returns, would it be compliant?

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Replying to Smalltalk:
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By johnhemming
07th Mar 2019 20:22

That sounds compliant to me.

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