Thursday 1 April 2019 saw the long-anticipated launch of Making Tax Digital, initially only affecting VAT-registered entities, and even then only if they meet certain qualifying criteria linked to their VAT-taxable turnover.
Here, Brian Palmer, tax policy expert for the Association of Accounting Technicians (AAT) and CEO of Tax Policy Advice, answers the most frequently asked questions associated with MTD, to help you get up to speed on this important new policy.
How did MTD come about?
The actual concept of MTD is now over four years old. In March 2015, then-Chancellor George Osborne heralded the genesis of MTD when he announced the death of the tax return by 2020.
As is so often the case with such grandiose announcements, it subsequently transpired that such a claim turned out to be greatly exaggerated.
However, MTD is finally going ahead, albeit in a much-reduced way that had been originally proposed!
Who is affected by MTD at this stage?
Where a VAT registered entity’s VAT-taxable turnover is £85,000 or more (the UK VAT registration threshold) it must sign up for MTD for VAT (MTDfV) and cease filing old-style VAT returns through HMRC’s portal or via non-MTD-complaint software. Ultimately, this will include non-UK resident businesses who are UK VAT registered, where they exceed the £85,000 threshold.
As of 1 April 2019, these businesses are now legally required (mandated) to maintain digital accounting records and file their VAT return information using HMRC-recognised, MTD-compatible software. Once a business has enrolled, it cannot leave, even if its VAT-taxable turnover falls below £85,000. The only way to exit is to deregister.
Mandation applies to return periods starting after 31 March 2019. It does not apply to a return period that starts before 1 April 2019 and ends after.
Of those mandated, 3.5% of businesses (those with the most complex VAT affairs) have had their start date delayed by six months to 1 October 2019.
Although the list is not intended to be exhaustive, the term VAT registered business/entities encompasses sole-traders, partnerships, limited companies, LLPs, trading charities and not-for-profits, the NHS and Local Authorities.
Are there any exemptions?
Yes. While HMRC expects those mandated to meet their legal obligations, the department recognises this might not be possible for a small subgroup of VAT-registered entities to use digital tools to keep business records or submit MTD-compliant VAT returns.
An exemption can be applied for on the grounds of:
- remoteness of location
- being run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records
- for any other valid reason
An exemption automatically applies for:
- a business subject to an insolvency procedure; or,
- those who were previously exempt from online filing (they will have their exemptions carried over).
HMRC will examine exemption applications on a case-by-case basis.
What about those businesses with VAT-taxable turnover under £85,000?
They are not required to sign up for MTDfV purposes. Nevertheless, they will be accepted into the MTDfV if they apply as a voluntarily registered business.
However, if at a later date a voluntarily-registered business decides it would like to return to submitting non-MTD-compliant returns they can, provided that HMRC is informed in advance. Exit from MTDfV would be effective from the start of the next VAT period following HMRC’s notification.
When will the first VAT reporting period run?
Those mandated will be required to commence keeping digital records for MTDfV purposes from the first day of their first VAT return period commencing after 31 March 2019.
- If the preceding return period ended 31 March 2019, the business is required to start digital record keeping for all future return periods from 1 April 2019.
- If a VAT-registered entity is part way through a VAT return period on 1 April 2019 which expires (for example) on 30 April 2019, it will be required to start digital record keeping, for all future return periods, from 1 May 2019. Similarly, if the overlapping return period runs to 31 May 2019, the mandatory requirement to start digital record keeping will apply from 1 June 2019.
How do agents know which businesses have been deferred until 1 October 2019?
ICAEW has published a helpful list that details the categories of registered entities not required to on board until after 30 September 2019.
The deferral group includes:
- Public sector entities (where additional information is supplied)
- VAT groups
- Annual Accounting Scheme users
- Unincorporated ‘not-for-profit’ organisations (including some charities)
- VAT divisions & groups (the deferral applies to the group registration)
- Traders based overseas
- Those required to make payments on account
HMRC has recently written to all those within the deferral group, advising them they do not need to sign up until after the end of September.
If you are involved with a VAT-registered entity that you believe should have received an HMRC deferral notice and hasn’t, it will not have had its mandation date deferred.
If you are in any doubt over the position you should contact HMRC’s VAT helpline to ensure that HMRC is aware of the deferral entitlement. Any entity without a deferral notice will not be deferred.
Which software is MTD compliant?
On the “Find software that's compatible with Making Tax Digital for VAT” page of GOV.UK you will find a section dedicated to helping interested parties establish which third-party packages are HMRC recognised for MTDfV purposes.
Within the section, HMRC has a click-through to a tool with search functionality to assist users to look for software by name and certain other key features, such as whether it is suitable for businesses or agents.
The list of HMRC recognised software solutions now numbers over 220 products, it continues to grow.
AccountingWEB also has a dedicated, filterable page on its Software Reviews tool featuring a user’s guide to buying MTD-compliant solutions.
Are businesses who do not comply with MTDfV likely to be penalised?
There is now a “soft landing period” in place which will last for the first year of a business’s mandation (be this from 1 April 2019 or later). During this period, businesses who are trying to get their digital links right when it comes to record keeping and filing will find there is a ‘light touch’ approach to penalties.
During the soft landing period, in the absence of a robust digital link, HMRC will accept the use of ‘cut and paste’ or ‘copy and paste’ as being an effective digital link.
If nothing else, businesses should be advised to ensure they pay over to HMRC the VAT due. Payment by the due date will avoid exposure to an automatic default surcharge.
I keep hearing the term ‘bridging software’. What does this refer to?
‘Bridging software’ was coined by HMRC to describe a digital tool capable of connecting accounting software (or spreadsheets) to HMRC’s system, thus enabling a VAT-registered entity to communicate digitally with HMRC.
It is a requirement of MTDfV that the submission of information from the VAT-registered entity to HMRC must be via an Application Programming Interface (API).
While HMRC expects most businesses to use API-enabled commercial software packages to keep digital records, in some instances this might not be possible. If this is the case, the business will need to use a bridging tool to connect its accounting software to HMRC systems, in order to exchange VAT information with the department.
What records need to be kept in a digital format?
To be MTDfV compliant, those mandated must keep a digital record of:
Their “designatory data”, as follows:
- Business name
- The principal place of business address
- VAT registration number
- Details of any VAT accounting schemes used
For each supply made there must be a record of the:
- Time of supply (tax point)
- Value of the supply (value excluding VAT)
- Rate of VAT charged
For purchase/expense incurred there must be a record of the:
- Time of supply (tax point)
- Value of the supply (value excluding VAT)
- Amount of input VAT to be claimed
There are some easements (petty cash/invoices with multiple supplies/third party statements) which are covered in the HMRC’s VAT notice 700/22.
Why do agents need an Agent Services Account (ASA)?
An ASA is the new way for agents to access HMRC digital services, and it is the only way that you can transact with HMRC in respect of MTD. Initially, it can be used alongside your existing Government Gateway Accounts (the existing agent portal).
The existing portal will continue to be used for HMRC online services for agents (income tax self assessment and VAT for clients not in MTD, and corporation tax) for some time yet. It will also remain the place to look up historic, pre-MTDfV information.
The ASA is still in the early stages of development, but currently caters for the following services:
- MTD for VAT, including signing up clients to MTD for VAT and a new online process for authorising new VAT clients
- MTD for income tax
- The Trust Registration Service which is used to register trusts and estates
How do I know which VAT clients are authorised on my ASA?
Unlike your existing Gateway accounts, when you log on to your ASA you will not be able to access a list of the taxpayers that you are authorised to act for.
Instead, when you subscribe a client for MTDfV you will receive an email acknowledgement from HMRC that your action has been successful.
In addition, some of the practice software for agents will track the clients that you are authorised to act for.
Can clients sign themselves up for MTD?
Clients are entitled to sign themselves up for MTDfV. It is a straight forward process, and to assist HMRC has published “Making Tax Digital for VAT as a business: step by step”.
About 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..