HMRC have finally released detailed guidance for taxpayers who may consider they should be exempted from MTD. Jason Piper reviews the terms and conditions.
The VAT helpline has been open for applications for exemption from MTD for some time, although only a handful of relevant calls have been received.
However, HMRC have already taken calls from taxpayers whose VAT registrations are voluntary, so they are automatically exempted from MTD on turnover grounds.
The new guidance is contained in an updated version of VAT Notice 700/22 at para 3.4. It tries to steer those taxpayers back to their existing escape route, but HMRC is still relying on the taxpayers actually reading the VAT Notice, which many may not do.
What the guidance covers
The new guidance follows much the same shape as the long disappeared Carter guidance for online filing, and addresses the three main categories of exemption:
- digital exclusion (not reasonably practicable to use digital tools…)
- religious grounds
Insolvency is clear enough, but it’s the other two groups that are likely to prompt the majority of applications for exemption from MTD in the short term.
Bluntly, if you are not already exempted from online electronic filing then the chances of getting a religious based exemption from MTD are virtually nil. There is no need to go online to keep digital records, so you would need to prove that it’s electronic machinery that’s the issue, rather than the internet aspect.
Given the stringency of the religious exemption test applied at tribunal for electronic filing, that would be a mountain for any applicant to climb.
However, the guidance example specifically mentions use of computers or other smart devices by the taxpayer – and it’s perhaps less unlikely that an individual would never have bothered learning to use devices which these days are mostly only useful if connected to the internet.
So if it would be unreasonable to expect you to learn to use an MTD software package or spreadsheet (because you’ve never used a computer) then an exemption could still be available – but strictly it would be on grounds of digital exclusion, rather than the religious belief itself.
It’s near on impossible to predict with any accuracy how many applications HMRC will receive from those who self-identify as digitally excluded as there’s been no specific research into digital exclusion in VAT registered businesses.
My best estimate would be low tens of thousands in the mandated population, but potentially hundreds of thousands from below the VAT threshold. If a proportion of them are going to start applying then the floodgates could really open.
The guidance on the digital exclusion circumstances goes further than might have been expected in some ways, and directly addresses some long held concerns.
Age of taxpayer
HMRC have confirmed that they will not set any fixed cut-off age as a limit for exemption; rather they will consider “how your age and circumstances impact your ability to follow the rules” for MTD.
Similarly, (and in line with the wording of the regulations) there’s no set bar on costs or administrative burdens. HMRC won’t grant an exemption if the additional effort, time and cost involved in making the transition to MTD is “reasonable”, and that’s in line with existing tribunal judgments around the burdens of online filing.
However, it doesn’t immediately help anyone decide what’s “reasonable”, and there are good grounds to argue that the threshold might be considerably lower for a sole trader than for an incorporated business. Similarly, unfamiliarity with the relevant software will be assessed on a case by case basis.
One aspect HMRC does address head on is support from friends and family as well as from paid agents. While not discouraging it, the guidance does note the likely need for whoever does the VAT work to have full access to the taxpayer’s financial records and the confidentiality concerns this might raise.
The guidance also specifically recognises that peoples’ circumstances can change, and that friends or family support might cease to be available for whatever reason. Taxpayers are specifically advised that if they can’t meet MTD obligations without that help then they should apply for exemption.
One specific point where the HMRC guidance is ambiguous is on whether taxpayers who apply for exemption now, but who are turned down, will still be expected to apply MTD for records from the 1 April 2019, if they only hear the outcome of their application between then and 7 August.
Although HMRC have committed to try to meet a 10 day turnaround for applications, given the current timescales for HMRC correspondence it’s quite possible that many taxpayers won’t hear back in time to choose, and learn how to use, MTD software before their first MTD filing deadline.
HMRC’s general policy is penalties won’t be applied if the taxpayer is making a genuine effort to comply with their MTD obligations.
Where a taxpayer joins MTD a quarter late, as they are waiting for the result of their realistic exemption application, it would seem reasonable to expect that no penalties would be applied.
This is perhaps a reasonable assumption given the statement to Parliament by the Financial Secretary to the Treasury (Mel Stride) on 19 February: “HMRC will take a light-touch approach to penalties in all cases, particularly those involving small companies. Provided that individuals and businesses are not wilfully trying to avoid or change the amount of VAT that is due, we will take a proportionate and light-touch approach.”
However, it would be comforting to have this confirmed by HMRC in a bulletin or in some other communication.
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Jason Piper works in the Professional Insights team of ACCA dealing with tax and business law matters. His policy and research interests cover all aspects of the design and implementation of tax systems and their interaction with business form and the wider economic environment.
He represents ACCA at a number of international expert...