Making Tax Digital exemptions: What agents should know

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Brian Palmer, AAT’s tax policy expert, outlines what we know so far about HMRC’s exemptions policy and process for Making Tax Digital for VAT.

Making Tax Digital for VAT (MTDfV) may now be underway, but for some achieving compliance with the mandatory digital requirements might not be so easy.

Who has to go digital?

MTDfV legislation requires VAT-registered entities (including sole traders, partnerships, limited companies, not-for-profit organisations and local authorities) with an annual VAT-taxable turnover above the £85K compulsory VAT registration threshold to:

  • Keep their VAT records in digital form; and
  • File all future VAT returns using MTD-compliant software.

While MTDfV came into effect from 1 April 2019, for those affected the legal (mandatory) requirement to comply is effective from the start of the first VAT return period beginning after 31 March 2019.

However, 4% of the £85K cohort, those with more complex VAT affairs, have had their mandation deferred until 1 October 2019.

Who doesn’t have to comply?

While HMRC will accept any VAT-registered entity, irrespective of their VAT-taxable turnover, in MTDfV, for those with VAT-taxable turnover below £85K there’s no legal requirement.

What if you cannot comply?

In its own guidance (VAT notice 700/22: Making Tax Digital for VAT) HMRC states:

“HMRC expects that most customers will be able to meet the legal obligations of Making Tax Digital, but accept that it may not be possible for a small number of customers to do so.”

Helpfully, the guidance assures readers that they will not have to comply with MTDfV rules if HMRC is satisfied that either:

  • It is not reasonably practicable to use digital tools to keep your business records or submit your VAT returns because of age, disability, remoteness of location or for any other reason
  • A person or business is subject to an insolvency procedure
  • A business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records

While HMRC’s guidance is clear, an exemption will not be granted purely on the basis that reasonable effort, time and cost may be involved in making the transition. It does state that such things will be taken into account in the overall assessment of whether it is practical for an entity to achieve compliance with the MTDfV rules.

Already exempt                                                  

Those already exempt from online filing will automatically be exempted from the need to comply with MTDfV’s digital requirements.

Excluded but wish to comply

A taxpayer who on their own might be exempt but gets help from another, such as a bookkeeper, friend or a family member, may choose not to apply for an exemption.

However, if at a later date the third party ceases their involvement it would be perfectly acceptable for the taxpayer to apply for an exemption at that time.

How to claim exemption

All the usual avenues of HMRC contact are open to would-be claimants and the department’s own guidance acknowledges that it is perfectly acceptable for a third party to contact HMRC in respect of the exemption-claim, stating:

“You can ask an agent, friend or family member to ask for an exemption on your behalf, but they must:

  • fully understand your circumstances in relation to getting an exemption
  • have authority to act on your business’ behalf - such as written authorisation sent to HMRC or verbal authorisation on a phone call.”

What is needed?

Those contacting HMRC will need to provide:

  • VAT Registration Number (VRN)
  • Name and principal place of business
  • Reason for the exemption request
  • Details as to why it would not be possible to keep digital records or file an MTD-compliant return
  • Details of how returns are currently file
  • Any other reason preventing compliance with the rules for Making Tax Digital.

What’s the best approach?

HMRC would prefer an exemption claimant’s first contact to be via the VAT general enquiries helpline. Indeed, the department has assured AAT and other professional bodies that it has been training up its helpline staff in anticipation.

While HMRC intends to deal with as many exemption requests via telephone, it acknowledges that “we may ask you to make a request in writing”.

Written response from HMRC

Irrespective of the approach and outcome, all applicants will receive a written copy of HMRC’s decision setting out:

  • That they are, or are not, exempt
  • How to appeal

Less than helpfully, if you are genuinely entitled to an exemption, HMRC guidance states:

“ You should continue filing VAT returns the way you usually do if:

  • you’re waiting for HMRC to make a decision on an exemption request or an appeal after being rejected for exemption
  • HMRC has told you that you’re exempt from Making Tax Digital.”

Has there been a spike in exemption claims?

Despite some pundits anticipating that the more onerous digital recordkeeping requirements imposed by the introduction of MTDfV would lead to a spike in exemption claims, to date AAT is not aware of this happening.

Of course, it is still early days. If one ignores monthly return-filers, the majority of the 1.3 million VAT-registered businesses affected are not due to file their first MTD-compliant VAT return until July at the earliest.

In summary

  • HMRC VAT Notice 700/22: Making Tax Digital for VAT is the go-to guide for MTDfV
  • Those who are already exempt continue to be exempt
  • All fresh applicants will be considered on a case-by-case basis
  • Applicants will be considered to be subject to the digital requirement for MTDfV until granted an exemption
  • HMRC will confirm their decision in writing
  • There is an appeals process
  • To date, AAT is unaware of any spike in exemption claims.

About Brian Palmer

brian palmer

Brian is Tax Policy Adviser for the AAT (Association of Accounting Technicians) and CEO of Tax Policy Advice. He has considerable all-round experience of the UK tax system, gained from the unique perspective of being an agent in the field and a tax policy adviser.

Experienced in providing guidance on consultation documents as a tax policy adviser, Brian is also the public-face of the AAT on tax-related matters. This role demands leading the primary relationship with HMRC and key stakeholders to help formulate conclusions and recommendations for AAT to implement.

In 2013 Brian received the Tax Transparency Award from HMRC..

Replies

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29th Apr 2019 10:48

We applied, on behalf of a non-computer literate pensioner with commercial lettings, on the grounds that it was not possible for him to keep digital records (he records everything by hand in a big analysis book). Of course they have rejected the application because we can do it all for him!
I cannot see how that reconciles with HMRCs aim for information to be recorded from direct records on a timely basis. We will be waiting until the end of each quarter and then working mainly from his handwritten records as the bank statements alone do not show enough detail and we dont see his cheque book or paying in slips.

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to Homeworker
29th Apr 2019 13:15

HMRC can't force you to do it for him because you would charge for your time so the business would incur expenses to comply. Depending on how much you charge and how much profit the business makes it can then be argued that it is not reasonable for the business to incur the expenses.

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to kevinringer
29th Apr 2019 14:35

Very good point but sadly with HMRCs inadequate staff its far easier for them to say " we have thought about it and No you are not exempt".

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29th Apr 2019 11:02

I am thinking of joining the Wholly Agnostic Order of Epicurean Hedonists whose Articles of Faith exclude the use of electronic communications and records.

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29th Apr 2019 12:42

If absolutely everyone declined to join in this fandango we might get somewhere, like businesses making money. HMRC certainly did not hear of "garbage in garbage out" when this was all designed. As I said to Brian when this was all initiated, why should taxpayers have to go to extra expense to submit VAT returns? The pensioner's books will be excellent, I have no doubt. The mistake was an accountant did the exemption application for him ...

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29th Apr 2019 13:12

Re 'How to claim' - I did phone the VAT General Helpline for my first MTD exemption application (an 82 year old sole trader with no family). It took over 100 attempts to get through over a period of 2 weeks. When I did get through I was told I cannot submit exemption applications over the phone. I pointed out 700/22 3.4 then they agree I could. I gave details and was told I would hear soon. That was two months ago. I've heard nothing since. I've sent my subsequent applications in writing.

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29th Apr 2019 14:32

I listed my clients down and said I wanted to claim exemption , this was about six weeks ago . I had a strange letter from HMRC last week saying that they could not talk to me as they held no 64-8 for the first client on the list . They made no mention of the others and so I am waiting for another 20 or so letters. With the letter I did get from HMRC I sent a reply with a 64-8 and explained they had been dealing with me for 20 years plus so could they explain. I am very proactive with this but my clients are honestly struggling to comply and for me to do it for them would take far too long, HMRC are placing an onerous task on the very smallest business entities even for computer literate well educated forward thinking taxpayers. A very sad time for the Accountancy profession and very worrying.

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30th Apr 2019 09:14

We are now getting to the "nitty gritty". It's a forgone conclusion that HMRC will veto any exemption that might allow many to not file under MTD. So a strong case has to be taken to appeal. I have to agree with dmmarler with regard to the exemption application. I don't think it will be much of a problem this first year as HMRC won't have a clue if the records are done digitally or otherwise. The next year will be the telling one (if HMRC and software are up to scratch) when HMRC are intending to "tag" every transaction. I think they will have too many problems to sort out this year to be able to start the real intrusion next year.

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to johnjenkins
30th Apr 2019 10:53

The sooner I’m out of this the better .
A client today sent records in a year out of date on Sage - reason being they are dyslexic . What does that say about MTD !

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to GHarr497688
30th Apr 2019 11:47

HMRC do not and don't want to realise that there are many small business that haven't a clue about paperwork. We have always been the "middle people" to bridge that gap. MTD will take a lot of that away from us leaving a void. This will be apparent and manifest itself during this year.
I'm 70 and been an Accountant for 54 years and still love the work.

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to johnjenkins
30th Apr 2019 11:53

You are correct - I had a young guy in his 20's signed up tp Xero - claimed VAT on everything and when I told him he said he would file his own VAT . HMRC are about ti lose a fortune in tax.

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