Making Tax Digital exemptions: What agents should know
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.
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.
Industry insightsView more
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.
- 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.
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...