MTD exemptions guidance released

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HMRC have finally released detailed guidance for taxpayers who may consider they should be exempted from MTD. Jason Piper reviews the terms and conditions.

Helpline open

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…)
  • insolvency
  • 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.

Religious exemption

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.

Digitally excluded

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.

Admin burdens

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.

Support needed

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.

Timing issues

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.

Penalties

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.

About Jason Piper

Jason Piper

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 groups on tax and business law matters, convened by the UK Government, the European Commission, Accountancy Europe, the European Association of Craft, Small and Medium Sized Enterprises (UEAPME) and the Business and Industry Advisory Committee to the OECD (BIAC).

Replies

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01st Mar 2019 13:17

Is this really an extension of time to join in other words an effective delay ?

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By Tornado
01st Mar 2019 15:15

"However, HMRC have already taken calls from taxpayers whose VAT registrations are voluntary, so they are automatically exempted from MTD on turnover grounds"

In relation to claiming digital exclusion -

"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."

I am unsure of the context here. Those that have turnovers under £85,000 are going to be voluntarily registered and thus will not need to apply for exemption on any grounds, but there is an implication that there will be perhaps be hundreds of thousands in this range applying to be digitally excluded.

Why would this be?

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to Tornado
04th Mar 2019 13:49

Sorry for any lack of clarity there - the worry is simply that unrepresented voluntary registrants will apply unnecessarily, and "gum up the works". That wasn't something I'd thought would be a significant issue, but HMRC found that of those who had made calls to request exemption an appreciable proportion didn't need to.
It's vital therefore that the message gets out to those below the registration threshold that they don't need to do anything, even apply for exemption. Unfortunately of course the VAT Notice isn't necessarily the first (or even last) thing those taxpayers would read, and similarly there's not a lot more the professional bodies can do to reach them, since most probably won't have an accountant advising them either.

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By Tornado
to Jason Piper
04th Mar 2019 14:18

Thank you Jason, that is much clearer and your concern for HMRC being flooded with queries from those that do not need to phone or apply is very touching!

In practice, I think the lines will be flooded with those over the limit that want to apply for digital exemption. For some the prospect of changing their whole business structure will be difficult, time consuming and expensive so the obvious initial option would be to apply for digital exemption.

What a mess this all is and I have no sympathy with HMRC at all.

HMRC have taken a project that had some real merit and a long term chance of success, if dealt with properly, and turned it into the 'car crash' that it will be, to quote the House of Lords. What a bunch of clowns HMRC are.

Thanks for the article Jason.

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to Jason Piper
04th Mar 2019 18:05

So how does one file a vat return post 1 April. At present I use the on line portal. My turnover is less than £85k and I am registered voluntarily

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to Jamesshaw56
05th Mar 2019 05:21

James, nothing changes for you. The existing GOV.UK will remain open for voluntary registered businesses.

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01st Mar 2019 16:51

Bit confused. Is the HMRC involved in time travel or has a government minister been caught lying.

Notice 700/22 says last updated 18 January 2019. I am sure I have looked at this document since then and that the exemption guidance was not there.

On 19 February 2019 Mel Strike told the House of Commons that the exemption guidance will be issued shortly?

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to david.bransbury
01st Mar 2019 16:57

Although VAT Notice 700/22 says" 18 January 2019" at the top, it was altered this week to include the exemptions text in section 3.

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01st Mar 2019 16:53

I can assure Mel Stride I will be taking MTD as seriously as he takes took the House of Lords Select Committee report.

Ie paying very minor lip service to it, but fundamentally rejecting its core principles unless it suits me to do otherwise.

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to ireallyshouldknowthisbut
01st Mar 2019 17:28

The only problem is that there is no financial penalty on Mel Stride for ignoring HOLs (and in the current climate any political penalty).

Filing penalties do not have to have a warning letter sent by the HMRC.

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to david.bransbury
01st Mar 2019 17:40

I appreciate you are selling software David, and I am peeing all over your and the rest of your industry's sales pitch but quick fact check, The "new" MTD penalties are yet to be agreed.

So long as you pay the right amount of VAT, HMRC have not got much to hit you with under existing legislation. All they have is some rarely used powers which require notices to be issued.....

Rebecca wrote an article on it, as have the ICAEW tax facility, i am not making it up!

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to ireallyshouldknowthisbut
01st Mar 2019 18:48

Firstly you obviously do not know who I am. I am not a software seller.

Secondly as member of the ICAEW tax faculty it was them who informed me about the £400 per return the HMRC could possibly use for MTD for VAT even though this was introduced for the removal of paper returns and nothing to do with MTD.

I have to admit I have just got the VAT text book out and was surprised to see that "failure to comply with any Treasury Order relating to VAT" does require a warning letter. I have in the past said that I hope that the HMRC send out a warning letter for those the HMRC know for certain should under MTD but are not. My hope has come true.

Sorry I am still bitter about an overseas couple who were hit with a £1,300 penalty each in January 2017 for not informing the HMRC about selling a UK property in June 2015 for no profit and thus no tax payable. They certainly did not get any warning letter from the HMRC. I have also dealt with ATED penalties. For once VAT man is more friendlier than his Revenue colleague.

I just don't trust the HMRC to be friendly if the HMRC find out that you are not following their rules because you do don't agree with their rules.

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to david.bransbury
04th Mar 2019 10:51

Apologies David, I was confusing you with another poster who is selling software.

Re your couple, I would appeal that penalty. Daily penalties have been removed by HMRC for NRCGT, and the law was changed in (2017 (??)) such that if there is no tax due you dont need to file the form. So I would certainly appeal those. Even before the law was changed a good 50% of such penalties got quashed at FTT, and I imagine we will get the same on VAT so long as you file with the new system, even if everything is not digital in the background.

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03rd Mar 2019 09:46

I predict a LOT of cases going to tribunal for 'digitally excluded' taxpayers- particularly when MTD is extended to the unrepresented / below £85k brigade.

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04th Mar 2019 13:06

Jason, what's happened to "any other reason"?

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to johnjenkins
04th Mar 2019 14:21

It is still there, and implicit in the bit of the guidance where it says "HMRC will however take effort, time and cost into account in its overall assessment of whether it is practical for you to follow the rules for Making Tax Digital." but not really explicitly discussed in the guidance, and a little hard to explore without concrete examples.
HMRC are of course already using that power with the October deferral letters as well, which are both a direction under Reg 25A to keep filing how you are, and also a specific “notification of exemption under Regulation 32B SI 2018/261 from the requirement to keep an electronic account (digital VAT records)”

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to Jason Piper
04th Mar 2019 14:31

So I presume if you normally do your vat by just adding up figures from a couple of columns and give all to Accountant at end of year, then going digital could mean extra work, effort and cost. For me there's so many scenarios, if they all went to FTT it would cause a major problem. Again this is new for Appeals so could be interesting.

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04th Mar 2019 14:03

We've all been waiting for HMRC to publish detailed criteria. HMRC said it wouldn't accept exemption applications until the detailed criteria was published. HMRC said it would publish the criteria in November but HMRC missed their own deadline (how come HMRC is allowed to miss MTD deadlines but businesses and agents are not?). HMRC have now bottled out completely and instead of publishing detailed criteria they've fiddled around with 700/22. But without detailed criteria businesses and agents don't whether they may or may not get exemption. This means:
1. Some businesses that would qualify may not apply for exemption and instead may incur unnecessary costs in complying with MTD.
2. Some businesses that would not qualify will decide to have a go and waste HMRC time submitting applications only to be rejected. To be fair on these businesses, without any detailed criteria to measure their case against how would these businesses know?
3. Agents have to waste even more time talking to clients about whether they may or may not meet criteria which have not been published.

Discussions about digital exemptions have been in progress ever since MTD was first announced years ago. HMRC has known it needed to set criteria at the time but HMRC has repeatedly failed to do so. This ongoing failure will only result in HMRC being overwhelmed with exemption applications. But what happens next? HMRC rejects them but without published criteria businesses will simply appeal to the tribunals who are likely to be more sympathetic to businesses than HMRC. That means we'll end up with many businesses excluded. HMRC could save themselves and businesses a lot of resources by publishing the criteria.

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06th Mar 2019 08:59

So HMRC update the VAT notice on 01/03/19 but leave the date at the top as "Updated 18/01/19".

Is that not backdating?

I had circulated a copy of the original to all staff. Need to do again.

What's to stop HMRC doing this again and again and again.......

This constantly moving target is madness. I know it's the "agile" way but for goodness sake stop making it up as you go along.

One rule for HMRC and another for "John" the plumber.

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08th Mar 2019 11:35

OK....I have a client who is 69, keeps beautiful Simplex book VAT records (they are like a work of art!) but has no digital skills whatsoever. Never even seen a spreadsheet until I showed her one today. She is a sole trader - widowed some years ago.

I want to apply (not phone) HMRC for exclusion from MTD for VAT. Is there a formal process and address to write to?

Thanks (1)
to Kaylee100
09th Mar 2019 14:30

Applications for exemption should be made either by phone to the VAT helpline: 0300 200 3700 or in writing to:
HM Revenue and Customs
VAT Written Enquiries Team
Portcullis House
21 India Street
Glasgow G2 4PZ
United Kingdom.

Thanks (2)
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to Rebecca Cave
09th Mar 2019 15:40

Many thanks Rebecca. Are there any clear criteria I should be testing my letter contents against?

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to Kaylee100
11th Mar 2019 09:07

Immediately after HMRC published 700/22 in August 2018 I followed the instructions in 700/22 and phoned the NAL to apply for exemption. The NAL told me they were not accepting applications until the exemption criteria is published in November 2018. November came and went without the criteria being published. It is still not published.

I have many clients for whom MTD will be extremely difficult. These clients have either never used a computer in their life or only used it for the most basic of tasks eg checking the weather etc. They certainly haven't got the confidence/competence to use it of financial transactions (eg online banking). I feel these clients should be exempted but without HMRC publishing criteria I've got nothing to measure them against. HMRC's failure to publish criteria could mean agents/businesses applying for exemption for cases that don't stand a chance, or failing to apply for businesses that could be granted exemption. HMRC has been aware of the need to publish criteria ever since MTD was first discussed years ago. So why have HMRC failed to do so. This will only result in more HMRC resources being used and more cases going to the tribunals.

Thanks (1)
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By djtax
to kevinringer
15th Mar 2019 10:44

Kevin - one area that concerns me is what HMRC will say where your digitally excluded clients have for years been seen to be filing electronically on the existing Gateway - if only by you on their behalf. Where we accountants have been doing all the digital stuff in the past won't HMRC say that means we should carry on our work as before but now using the new system?

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to djtax
15th Mar 2019 11:17

djtax wrote:

Where we accountants have been doing all the digital stuff in the past won't HMRC say that means we should carry on our work as before but now using the new system?


The rules say exemption may apply if 'it’s not reasonably practicable for you 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'. It was reasonable for the client to maintain paper records and pay us to spend 5 minutes a quarter receiving a phone call from the client with the totals and us inputting them into GOV.UK. But is it reasonable for the client to pay us for spending many hours digitising all the transactions?
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By Tornado
to djtax
15th Mar 2019 12:06

Agents can be transient and can only act on behalf of the Taxpayer when they are authorised to do so. The Agent, therefore, has limited ability to act for a Taxpayer and whatever happens, the responsibility always lies with the Taxpayer to ensure that their tax submissions are correct.

In my view, it make no difference if the Taxpayer uses an Agent or not to assist them with their tax submissions/accounting as it will the ability of the Taxpayer to personally maintain digital accounting records that counts. The fact that a Taxpayer does use an Agent to maintain their accounting records is very much a verification that the Taxpayer cannot do it themselves and an exemption should be granted in these circumstances

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By djtax
to Tornado
15th Mar 2019 13:59

I agree with Kevin and Tornado - but my point is will HMRC?

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to Kaylee100
11th Mar 2019 09:12

Just put the facts of your case. If HMRC reject and you feel their decision is wrong then appeal. You only need one appeal to set a precedent and HMRC will then have to conform. The test case would have to be strong though.

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to johnjenkins
20th Mar 2019 06:15

Thats the issue. Whats strong when we have no criteria to bench it too?

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to Kaylee100
20th Mar 2019 08:51

You look in detail at HMRC criteria for exemption. If your client fits the criteria then ask HMRC for an exemption. If HMRC turn you down then look at the reasons why. There will normally something that they feel doesn't fit what their criteria is. Then you take a good hard look at the scenario from above (basically taking your client and HMRC out of the equation). Look at the pro's and cons, then decide if you have a case to go to appeal. If your case is strong HMRC will pull out cos they don't want a precedent set.

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to johnjenkins
20th Mar 2019 09:14

Thanks.

I seem to be ignorant of where to find these detailed HMRC criteria.

I have looked at 700/22 but can only find 3.1 and 3.2 (referring to only two small examples based on disability and location) which are not very helpful on criteria for age coupled with being a sole trader and a significant lack of computer/digital acumen.

The hard look side of things is fine. I have 60 clients I need to advise on this and this is the first so far that strikes me as a case of "if she doesn't get it, who will? " (barring the religious side and those with no broadband/current exclusion).

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to johnjenkins
20th Mar 2019 09:29

johnjenkins wrote:

You look in detail at HMRC criteria for exemption. If your client fits the criteria then ask HMRC for an exemption.

That's the problem - HMRC are not publishing the criteria.
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to kevinringer
20th Mar 2019 11:09

I know it feels like they haven't but they have in saying they will look at cost etc. when assessing. So the first port of call will be applying for exemption on the grounds of costs etc. They will have to give a reason for rejection and that's where you will be able to challenge.
I have to stick up for HMRC here because until they get certain applications they won't know what the digital state of normal business is. Example:- if they get 100,00 0 as opposed to 10 applications on cost issues then they will obviously have to think about it. I do, however agree with other posters who are worried that HMRC might not look at the practical issues (although they say they will).

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to johnjenkins
20th Mar 2019 11:22

I think we have to be careful that our client situation falls into the (rather woolly) description in 700/22

"HMRC will not give you an exemption purely on the basis that reasonable effort, time and cost may be involved in making the transition to Making Tax Digital, for example choosing and buying any new hardware or software or learning to use them.

HMRC will however take effort, time and cost into account in its overall assessment of whether it is practical for you to follow the rules for Making Tax Digital."

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to Kaylee100
20th Mar 2019 11:51

This is where looking at the detail comes in.
Example:- 70 year old in a remote location, using only a landline (no broadband and no mobile) with handwritten income and expenditure sheets of paper (receipts attached) could claim going onto MTD might put them out of business due to set up and ongoing costs.
Example:- 30 something year old in a city claiming computer, mobile and broadband in accounts, wouldn't stand much of a chance (although the on going costs due to outsourcing as busy in business could put them out of business).
Now the good bit. You have all the possible scenarios in between these examples.

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to johnjenkins
20th Mar 2019 12:17

Yes, and most are in between as very few people don't have any broadband at all. Owning broadband though hardly makes someone digitally capable.

I'm not trying to be awkward but I just don't interpret this as detailed HMRC criteria for me to check my client fits.

If there isn't any, I just need to know there isn't. I had just assumed when you said look at the detailed criteria there was a list I was missing.

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to Kaylee100
20th Mar 2019 12:37

Kaylee, what you have to think about is that MTD is new for us and HMRC so it's going to be a bit of a "suck it and see" situation.
I think the clue is in the phrase "HMRC will look at costs etc. and any other reason". So they are not closing the door.
5 years on and you will probably find that one of your clients will fit into a certain category but now it's hit and miss.
The VAT tribunal will be looking at the practical issues more than HMRC. That is why I think HMRC will try to refrain from going to tribunal.
Still MTD and Brexit might all be a dream and we will wake up on the 1st April with the news stating that it was all an April fool hoax. (Well if it can happen in soaps why can't it happen in real life?)

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10th May 2019 11:57

My client who applied for exemption has been granted it. I helped advised her on her application but she did it as she has never used us as agents for VAT filing in the past.

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to Kaylee100
10th May 2019 12:42

That is good news. Perhaps Aweb could set up a profile on exemption so that we can all have access to who gets it and who doesn't.

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10th May 2019 13:21

I've had my first exemption application accepted. I submitted it over the phone in March but took almost 100 attempts to get through. Since then all my exemption applications have been made in writing. It took about 30 working days for HMRC to reply to my application.

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to kevinringer
10th May 2019 14:53

Has anyone had a rejection yet or are all applications being accepted?

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