HMRC has issued the MTD for VAT notice alongside a communications plan for advisers to use to educate their clients about MTD. There are also now 18 approved MTD for VAT software providers.
This VAT notice 700/22: Making Tax Digital for VAT, expresses the law relating to MTD for VAT in a readable form and includes guidance from HMRC to fill the gaps where the law is deficient. It will be essential reading for all tax advisers and businesses who have to either advise on MTD, or who need to follow the MTD rules from 1 April 2019 or a later date.
The most important parts of the notice are part three: digital record keeping and part seven: examples of digital links (see below).
VAT-registered businesses with annual VATable turnover under the VAT registration threshold (currently £85,000) don’t have to follow the MTD rules, but if they wish to do so they must tell HMRC in writing. No postal address for this is given in the notice, so I assume that all written queries about MTD should be directed to the VAT written enquiries team.
Businesses that want to claim exemption from the MTD rules on the grounds of religion, insolvency, or because it is not reasonably practical to use digital tools (see section 2.2), will have to contact the general VAT helpline to ask HMRC to approve the exemption or provide “digital assistance”.
HMRC will host a webinar for tax agents focusing on this VAT notice on 24 and 25 July, which may explain what form digital assistance may take and whether a dedicated MTD helpline will be provided.
Not fully working
The VAT notice confirms that the full MTD service won’t be available from HMRC when MTD for VAT goes live in April 2019. Businesses won’t be able to submit voluntary updates or supplementary data to support their VAT return. HMRC says these features will be available at a later date.
Information which is required for the VAT return must be kept in a digital form within functional compatible software (see below). Only the information listed below is required; the business doesn’t have to keep a digital image of each purchase invoice.
Some permanent information about the business must also be recorded digitally such as the name, address, VAT number and any VAT accounting scheme used.
For each VATable supply made by the business it must record:
- time of supply (tax point)
- value of the supply (net value excluding VAT)
- rate of VAT charged
The business doesn’t have to record the amount of VAT charged, as presumably the software will calculate this. It also doesn’t have to record transactions which don’t affect the VAT return, such as supplies within a VAT group.
For each purchase which is relevant to the VAT return the business must digitally record:
- time of supply (tax point)
- value of the supply
- amount of input tax that the business will claim.
A business which is partially exempt or which uses a VAT scheme may not know how much VAT it can reclaim on each individual invoice. In that case, the business has the choice to record:
- all the VAT paid; or
- none of the VAT; or
- estimated amount of the recoverable VAT.
Then once the partial exemption or other scheme calculation is done for the VAT period, an adjustment is made to the digital VAT records.
The “functional compatible software” in which the VAT information is recorded can be a number of software programs, products, applications or spreadsheets which are digitally linked together. A digital link is an electronic or digital transfer or exchange of data between software programs, products or applications. This definition has the force of law.
The VAT notice sternly warns that the use of “cut and paste” does not constitute a digital link. However, using digital links between software to transfer data needed for the VAT return won’t be compulsory until VAT periods starting on or after 1 April 2020. This constitutes the “soft landing”, which may be explained in greater detail in the forthcoming HMRC webinar.
There are a number of examples of digital links in section seven of the VAT notice.
The suppliers which have demonstrated a prototype of their MTD software to HMRC and who have tested their products within the HMRC test environment are listed here, but the links to each supplier’s website do not always take you directly to the software product.
You have to delve around to find the product which may suit your requirements. Some suppliers such as PwC claim to supply spreadsheet-based products, but this “bridging software” is still hard to find.
The tax profession has been crying out for HMRC to start marketing MTD to the wider business community, as some clients believe that it is all a ploy to get them to buy expensive and unnecessary software.
HMRC appears to be dodging its responsibilities in this regard, as it expects accountants, professional bodies, and software suppliers to do this marketing for them.
It has produced an MTD for business stakeholder communications pack, which contains messages to pass on to clients, customers and members, plus a link to a video explaining MTD. There is no indication of what HMRC will be doing itself to market MTD to the wider population.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.