The amended Making Tax Digital timetable announced in July shifted its focus to VAT. So what do we now know about who will be affected and when?
The draft legislation issued so far focuses on income tax issues. While the draft Finance Bill 2017-2019 deal with income tax matters, we don’t have sight of any VAT regulations yet, as HMRC has only issued an overview document of ideas about what the VAT regulations may contain.
We do have draft regulations for MTD which deal with the general matters which should be common to all taxes:
HMRC has also issued an explanatory note on the MTD notices which will be issued to taxpayers to require them to comply with the MTD regime.
Who will be affected and who won’t?
The first businesses to enter the new MTD regime will be those who are VAT registered (in the UK) and have turnover equal to or in excess of the compulsory VAT registration threshold (currently £85,000).
This is a lobster pot requirement, as once the business is within the regime it won’t be able to exit, even if its turnover falls below the VAT registration threshold at a later date.
Businesses with wholly exempt income, or that only have small amounts of VATable income, will not be drawn into the MTD for VAT regime, which will be a relief to medical practitioners, dentists, and residential landlords.
Businesses that have voluntarily registered for VAT (those below the VAT threshold or that are not required to do so – such as local authorities) will not be required to make MTD reports but will be able to do so voluntarily.
Overseas businesses that trade in the UK need to register for UK VAT, even if their UK turnover is very small, but (depending on their trading structure), those businesses may not have to register with HMRC for other taxes (eg corporation tax).
Such businesses will be exempt from MTD reporting if their UK turnover is below VAT registration threshold, and may also be exempt from the MTD requirements on the basis of digital exclusion, as they may not be unable to interact with HMRC’s systems from outside the UK.
What must businesses do?
Businesses within MTD for VAT will have two obligations:
- keep digital records of all transaction details, within software that is capable of linking directly to HMRC’s systems; and
- report the VAT return data via that software directly to HMRC, within five weeks of the end of their VAT quarter.
Only the totals for each of the nine boxes on the VAT return will need to be reported. The business can voluntarily report supplementary information on its transactions and the calculation behind each total for the nine boxes, but this will not be compulsory.
The submission deadline for MTD for VAT aligns with the current VAT return filing deadline, but it will not align exactly with the MTD for income tax deadline, which will be exactly one month after the end of the quarter for which the MTD report is being supplied – ie one week earlier.
A business will be able to submit the voluntary supplementary information for VAT (ie to align with income tax deadline) and send the final VAT return later.
Traders who use the annual accounting scheme for VAT will only have to submit the MTD for VAT report once per year, as is currently the case for that scheme. Which begs the question: what is the point of those traders being with MTD for VAT? It is possible that the annual accounting scheme will be phased out.
When will it start?
The overview documents for VAT regulations state that it will come into being from 1 April 2019. But before then we need to get through a period of consultation on the draft regulations, and a full year of testing of systems for VAT reporting – which has not yet started.
The changes to VAT and customs duties brought about by Brexit may well apply from 1 April 2019, which is exactly the same timing as the commencement date for MTD for VAT. Is it reasonable that businesses will be expected to cope with these two huge changes at the same time?
As around 12% of VAT-registered businesses use accounting software to submit their VAT return directly from their accounting software to HMRC, with no intervening step (as required for MTD), the software producers have got a long way to go to bridge that gap.
There will be particular issues for VAT groups that need to combine accounting information for a single VAT return from several companies, and for businesses who use any type of VAT scheme which requires adjustments to the accounting figures such as:
- Flat rate scheme (FRS)
- Tour operators margin scheme (TOMS)
- Cash accounting
- Capital goods scheme.
At present, there is no indication from software providers that one product will be able to deal with the MTD for VAT filing and the MTD for income filing, so businesses face the prospect of using two or more software products to complete their MTD obligations.
All of these draft regulations and the overview document for VAT regulations are open for comments until 10 November 2017. Please post your comments below and we will form them into a response from the AccountingWEB community, alternatively send your comments on the draft law regulations directly to: [email protected]
Rebecca Cave appeared in the AccountingWEB webcast ‘MTD - What you need to do for April 2018’. You can register to watch the session on demand by visiting the Practice Excellence Live site and clicking ‘book your session’.
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.