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MTD: Mix and match of VAT software allowed

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21st Dec 2017
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Draft regulations to enable MTD for VAT reporting expose the muddled thinking behind the digitally linking of accounting software and spreadsheets.

Timing

Draft VAT regulations, and a notice to require taxpayers to comply with MTD reporting, were released for consultation on 18 December 2017, with a deadline for commenting set at 9 February 2018. This consultation period fits neatly over the busiest period for accountants and tax advisers, thus reducing the likelihood of detailed feedback from those who will be at the sharp end of the MTD regime, but I’m sure that is just a coincidence.   

Digital records

What HMRC calls “functional compatible software” must be used record and preserve prescribed VAT related data (see below). That software must be used to calculate the VAT due, report the VAT figures (as per the current VAT return) to HMRC via an API, and to receive information back from HMRC.

The VAT related data includes: for each sale and purchase the business; the time of the supply, value and rate of VAT charged, or in the case of purchases, the amount of input VAT allowed. There is no requirement in the draft regulations that the electronic recording of this data must be done at the time the supply is made, or when the purchase is received. As long as the data is recorded electronically by the earlier of the date that the VAT return must be submitted, or is actually submitted, this will be sufficient (reg 32A para 8).

Mix and match

The business can use more than one piece of software to keep its digital records, but those separate software programmes must be “digitally linked”. HMRC provides three examples in the draft notice of what it means by digitally linked:

  1. The business records transactions in accounting software (A), transfers the totals to spreadsheet (B) where adjustments are made for say partial exemption, then it uses another software package (C) to transfer the totals to HMRC. The transfer of data between A, B and C must all be done digitally. 
  2. The business uses accounting software to record all its transactions and to submit the VAT return. However, it uses a spreadsheet to work out the VAT adjustment on road fuel scale charges. That adjustment is manually typed into the main accounting package as a journal entry. As the road fuel adjustments are not part of the records which are prescribed to be kept digitally, the manual journal entry is permitted and the business is compliant with the MTD regulations.     
  3. A VAT group uses three different accounting packages (A1, A2, A3) for different companies in the group. The totals are collected in a spreadsheet (B) to create the VAT figures needed for the group VAT return. Spreadsheet B is then digitally linked to another software package (C) which is used to submit the group VAT return to HMRC. As long as software family A is digitally linked to B, which is also digitally linked to C, the requirements of the MTD regulations are met.  

The digital linking of the accounting software to other submission software or to any  spreadsheets used will apparently be a legal requirement, but the definition of exactly what digital linking means isn’t included in the draft VAT regulations currently out for consultation.

The reasoning behind digital linking is to avoid errors being introduced by human hand, but as it will be acceptable to make manual journal adjustments, and to perform manual calculations on spreadsheets as part of the process, the logic behind the digital linking falls completely flat.  

It is clear from the slide pack provided with the draft regulations, the taxpayer will be permitted to record his transactions in a spreadsheet and transmit that spreadsheet by email or even on a USB stick to his tax agent. The agent then imports the data electronically from the spreadsheet into his own accounting software which is used to submit the figures to HMRC.

What remains the same

The VAT reporting dates won’t be changed. Businesses will report their VAT information by the same deadlines and for the same VAT quarters as they do currently. There will be no requirement to change VAT quarters to align with the accounting period or tax year, if those quarters do not already align.

The data provided to HMRC will be exactly the same as the totals currently submitted in the nine boxes of the VAT return. No additional information to back-up those totals will be required, but businesses will have the option to voluntarily submit supplementary data, such as the split of sales between different rates of VAT.

Exemptions

A business may be exempt from MTD reporting on any of the following grounds:

  • Its turnover for the year ending with previous month is less than the VAT registration threshold;  
  • The owners are practising members of a religious society, whose beliefs prevent the use of computers;
  • Disability of individual, or location of the business, which makes it impractical to use digital tools; or
  • It is subject to insolvency procedures.

If one of these circumstances applies the business will have to contact the VAT helpline to discuss alternative arrangements to submit their VAT figures. A business can’t choose to be exempt. If it is in fact exempt from MTD reporting, it can elect to submit MTD reports using suitable software before the start of the next accounting period.  

Deregistration from VAT  

Both the draft VAT Notice and the VAT regulations make it clear that a business is drawn into the MTD reporting regime if its annual turnover (which would be subject to VAT) exceeds £85,000. If the business turnover drops below £85,000 the business must continue to make MTD reports until it deregisters from VAT.

Next stage

If you have comments to make on the draft regulations or VAT Notice you can send them to [email protected]. or post them below and AccountingWEB will include those in its response.

The regulations will be subject to the negative resolution procedure - which means that if no MP, or member of the House of Lords, objects to the draft regulations, they are passed with no debate in Parliament. 

This is effectively your last chance to influence the MTD rules for VAT.

Replies (73)

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Tornado
By Tornado
08th Jan 2018 13:44

With today's news about some of the further complications that are likely to arise with Brexit -

http://www.bbc.co.uk/news/business-42595875

I reckon we are now looking at something like 10/1 against MTD for VAT actually commencing in April 2019.

The country will be struggling with the basic changes that Brexit brings and will have no appetite for dealing with the additional work involved with MTD for VAT.

Indeed, where is the accounting software that will be capable of dealing with all of this anyway?

These unrealistic proposals must be kicked into the long grass soon and a more pragmatic approach taken to gradually introducing MTD after we have left the EU Club, and when there is more certainty about what is required and what is practicably achievable.

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Tornado
By Tornado
08th Jan 2018 13:44

Duplicated post

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Chris M
By mr. mischief
08th Jan 2018 14:07

Si Woodams,

What really annoys me about the Intuit guy and others like him - in fairness Gary from Xero is miles more annoying - is their stupid assumption that everyone not using their Cloud stuff is messing around in paper bags. I for one am not.

I use Xero, Intuit, Sage,Clearbooks, VT, spreadsheet methods and a few paper bag setups, maybe 15 out of 150 clients.

What is it that decides which method I use?

WHAT IS MOST EFFECTIVE FOR THE CLIENT.

Not the latest HMRC drivel.
Not the latest drivel from Gary of Xero.
Not what makes me the most profit.

Thanks (2)
Replying to mr. mischief:
SiWoodhams
By Si_Woodhams
08th Jan 2018 18:26

I agree with you about the most effective for the client - it is never a one size fits all system.

What I'm trying to say to everyone is that Change is constant, embrace it - rather than constantly moaning about it.

There have been loads of changes in the profession over the years inc. legislation changes, FRS, money laundering etc etc does it always result in everyone saying they are being "forced" t0 do something different?!

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Replying to Si_Woodhams:
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By johnjenkins
09th Jan 2018 08:51

Change will always be embraced by our profession as long as it is natural and progressive.
Major change on a myth will not be accepted under any circumstances.

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Replying to johnjenkins:
Tornado
By Tornado
09th Jan 2018 09:26

"Change will always be embraced by our profession as long as it is natural and progressive.
Major change on a myth will not be accepted under any circumstances."

This is an excellent summary of the way I (and I am sure many others) feel and will now become my standard answer to all who try to criticise us for not embracing the current woefully inadequate plans for MTD.

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Replying to mr. mischief:
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By EnglishRose
31st Jan 2018 13:32

And even I who does not even use excel have perfectly and impeccable records. They are not hand written but are typed and I can find everything in an instant. The fact they do not involve a mobile phone and are also printed out for extra back up is neither here nor there.

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By jline199
16th Jan 2018 14:17

An interesting discussion about the proposals.

On the HMRC website there is currently a facility to log into a VAT client and then file a VAT Return. Is it implied in the HMRC's proposal that such existing facility on the HMRC website will get withdrawn?

That is, how do the numbers currently get entered into that? Either manually, or copy and paste from some program.

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By Michael C Feltham
06th Feb 2018 18:32

Filed This evening.
MCF
________________
Response: MTDfb VAT Reporting:
________________

When the project concepts were originally released, Government indicated minimal cost impact upon small firms and taxpayers. Those historic figures have proven risible!

1. It must be remembered, the most hard-hit section of the UK business Population will be the SME community, which is least able to afford more costs. Since this sector is mainly computer illiterate, then they will have to seek assistance from their existing advisers.

It is critical to. comprehend the financial and economic contribution of the SME community to UK plc.

According to Government’s own statistics:

(https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil... );
________________________________
Small businesses accounted for 99.3% of all private sector businesses at the start of 2015 and 99.9% were small or medium-sized (SMEs).
Total employment in SMEs was 15.6 million; 60% of all private sector employment in the UK.
The combined annual turnover of SMEs was £1.8 trillion, 47% of all private sector turnover in the UK.
_________________________________

2. A core precept of MTDfb was to reduce errors. However, if data be migrated through up to three disparate systems, then this needs what is called Protocol Converters. Such will introduce a significant number of numerical errors.

3. VAT reporting is already digital: users take an analysis of period VAT inputs and outputs and enter same onto an HMRC website which receives and stores the data in digital format.

4. To demand a transactional model for data input would seem to serve little present purpose. Unless HMRC enjoy significant over-staffing and are able to take complex computer output and drill down into the minutiae of input to seek errors: this must be doubted.

5. Clearly, approved private sector firms developing MTD-Compliant software are still unable to finalise their product offering, as statutory parameters of compliance are not as yet fixed and agreed.

6. Ergo, third party software suppliers will have to rush out dedicated standalone software only to support VAT MTD filing, with little leadtime to allow normal Alpha, Beta and Gamma testing: which means glitches, conflictions and “bugs” would be common. Which will have a very short life cycle; thus the developers will have to recoup their sunk costs quickly, before such products are made obsolescent by the full-blown MTDfb software packages.

7. This will, again, impact financially, upon the lower echelon of the SME community; which forms the majority.

8. Once the full MTD-Compliant third party software accounting systems are finished, then they would necessarily contain a section dedicated to VAT recording and reporting.

9. Surely, it would be far more effective to delay the roll out of MTD for VAT, until the whole integrated systems go live?

10. Unfortunately, a large proportion of the investigative reporting on the core concepts of MTDfb, has been earlier, carried out by consultation with the top ten accountancy practices and their institutes.

These lack hands-on knowledge of the problems and difficulties the lower echelon constituents of the SME community (the majority) face on a day-to-day basis, as they are mainly focused on major multinational corporations and PLCs.

Those who do enjoy such knowledge are the SMP sector of the profession (Small to Medium Sized Practitioners): yet their hands-on experience “in the trenches” has not been taken into account, particularly. Furthermore, their professional bodies have simply not been sufficiently energetic, in this cause.

11. This is the very first time Government have enacted such wide-ranging paradigm shift changes in revenue collection. All major Government ICT projects to date have been concerned with either data capture and ordering (e.g. NHS) or the distribution of Government’s already harvested tax revenues. (e.g. Peter Lilley’s abortive Social Security Card System – dumped as impractical after the expenditure of £1 Billion in 1996 (ICL Pathway).

12. To threaten to destabilise Government’s tax revenue income at a time when Government’s Sovereign Risk borrowing is so high and growing, at a point in time when global financial markets are set to demand far higher interest rates, seems rather arcane.

Conclusion:

The respondent suggests the potential threats to stability of revenue harvesting far outweigh whatever amorphous gains might be achieved by MTD VAT, but probably will not be.

Michael C Feltham FFA, FIPA

February 6th 2018

Potted Bio:

Michael C Feltham is a qualified accountant with a public practice who spent much of his early life as an International Business and Finance Consultant specialising in Business Strategy.

He cut his teeth on IT systems whilst working for Ford Europe on de-bugging IBM
System 360 mainframe software; since when he became a serial entrepreneur: founding a Silicon Design House in the early 1980s, which included working in Silicon Valley, California for two months on projects. Thereafter he founded an ICT Solution Provider and System Integrator and a software House focused on SME-Centric BPMS (Business Process Management Systems).

Mr Feltham was asked to become an External Examiner and Moderator for the Anglian Business School at Cambridge and Chelmsford, Essex at MBA level, Now Ashcroft International Business School, part of Anglia-Ruskin University. He was the keynote speaker at a cross-campus seminar considering the impact of the internet and multi media and Distance Learning, on the HFE (Higher and Further Education) sector.

In 2000, he was one of four speakers at an important seminar in Reykjavík
Iceland for Gallop Inc. speaking on Knowledge Management Systems, Neural Networks and the impact of interactive internet systems on the conventional business model.

Thanks (4)
Replying to Michael C Feltham:
Tornado
By Tornado
06th Feb 2018 23:23

Thank you very much Michael, an excellent response.

It seems that we are in agreement then, and with reference to my first post on this topic, I finish in the same vein ......... it is all a load of tosh.

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Replying to Tornado:
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By Michael C Feltham
07th Feb 2018 10:28

Many thanks, Tornado; much appreciated.

Personally, I just cannot see any advantage to either HMRC or Treasury in this; quite the reverse, in fact.

To cause utter chaos in revenue collection when Government Debt is increasing by the week and global financial markets are roiled in uncertainty and plain fear for the longer term future (which is the metric which concerns investors in government paper)is utterly insane.

Clearly, at present Government is staffed at the top by raving idiots who suffer delusional cognitive dissonance from reality.

But we knew this anyway, really, as the muggers buddle over the Brexit so-called negotiations goes from farce to tragedy.

Thanks (1)
Replying to Michael C Feltham:
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By johnjenkins
07th Feb 2018 11:13

Surely TM realises that there is no deal to be had with the EU. They couldn't have spelt it out more obviously.
So let's pull out of the EU NOW. Put MTD and all the other expensive elephants on hold. Do a Donald Trump and reduce taxes. Pump the money into our infrastructure so that we can cope with the people we have and have a period of consolidation.

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Replying to johnjenkins:
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By Michael C Feltham
08th Feb 2018 13:07

John:

Stark reality is the UK run a massive Current Account (i.e. Balance of Trade) Deficit with the EU.

They have far more to loose, than Britain!

Then there is the little matter of Britain's annual contribution to the bloated EU monolith.

Add both together and we are talking real money, as my American chums say!

What is urgently needed is for a fire in his/her belly leader who will tell M. Michel Barnier where to stick it!

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Replying to Michael C Feltham:
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By johnjenkins
08th Feb 2018 09:00

I wonder who they got to do the silly "how much it will cost us to leave the EU" figures.
We overspend anyway, so if prices go up we buy less so spend less = more money in our pockets.

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Replying to Michael C Feltham:
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By EnglishRose
07th Feb 2018 20:03

I am not sure why I have such a bee in my bonnet over this and I am not exactly tech illiterate but being forced into MTD for my VAT next year is making me very cross (as a very small business person who already feels we have had a lot of change). It will cost money - we never seem to get anything that saves us money and will take a lot of time. I am not sure I will trust the new software either so will probably run my current systems along side anyway.

The post above sums it all up - the people they consult over these things are not those who will be affected. It is a weird way to introduce it - that those least able to afford and manage it are used first as guinea pigs and the driver seems to be understandably recovering more tax but I just cannot see how that will work either. I suppose if it nudges people to pay more it might but it could also prompt people to claim more VAT on expenses than they currently do. It should be utterly neutral for me as I am very good at recording everything every day but not neutral in terms of having to buy new software or even worse hire it and have to learn how to use it when finding time just to grab lunch is hard as I am so busy with work and admin already.

As suggested above it might even destablise Government revenue. It is making me so cross I can just see myself claiming (legally) more than I currently bother to do as it will annoy me so much.

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By North East Accountant
08th Feb 2018 09:09

HMRC have a plan, they just haven't told everyone yet.

1. Retreat to 13 silos (regional hubs).
2. Get everyone on software.
3. Initially say it's summary data but once everyone on board change that to transactional data.
4. Develop Connect until it's fantastic at spotting errors.
5. Make agents responsible for their clients Tax Returns so HMRC have someone they can hold responsible. An extension of CFA (Criminal Finances Act)
6. All done remotely so HMRC don't have to leave the comfort of their silo (Regional Hub).

Thanks (1)
Replying to North East Accountant:
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By EnglishRose
12th Feb 2018 09:21

That would not surprise me.

If it saved me money, saved me time and meant there was less tax to pay I would not mind but I see little chance of that.

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By Paul520785
17th May 2018 22:11

There are all sorts of if's and but's so far in this discussion but probably just as important is the lack of an internet connection which can be described as usable. When the situation exists where the internet connection is used to run a mobile phone connection leaving the position - voice over internet or leave for 30 minutes to see if the e-mails will arrive and be sent (Don't try both together because then nothing works)
MTD and or online submissions = no chance!

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Replying to Paul520785:
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By johnjenkins
18th May 2018 08:56

Yer but, not having a workable internet connection serves as a reasonable excuse not to have to submit and if you are of a particular religious persuasion then it's a double whammy.

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Replying to Paul520785:
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By EnglishRose
19th May 2018 14:42

It does worry me. My internet connectino is reasonable so there is no way HMRC would accept it is not good enough but my ISP does seem to cut it uot briefly about once or twice a day and what if I were inthe middle of doing some kind of on line cloud accounts rather than my normal paper records? I might lose data or a lot of time. I am going to have to invent a don't like change disability (they exist and I might well be on the margins of one)... joking but do wish they would get on with mandating the software I need to use soon as April is approaching.

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By Smalltalk
24th May 2018 15:05

We set our company as two different companies in Sage 50 years ago to separate two different sections of the business and the accounts work well for management purposes as two separate companies, but using the same VAT number, and submit the combined VAT returns on HMRC portal.
Could we then make adjustments on one section/company's VAT return, and then submit through Sage 50 in the future if we are pushed to submit VAT returns through software next year?

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By [email protected]
01st Jun 2018 17:39

I seriously do not know what 'new software' I am going to use. I only have a handful of clients, 1 ltd co and a few sole traders and thats it. I currently use stand alone sage (not cloud based) and for a real small one I use excel and then I use Taxfiler to submit the Ltd co. I am now in a position where one of my sole traders is registered for VAT so I have to think about software. They all seem so expensive and for me to spread that cost over the few clients I have is not practical. Any suggestions on any free software greatly appreciated.

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Replying to [email protected]:
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By accountright
01st Jun 2018 19:12

I've been looking at NJT VAT Return Manager. Seems simple enough and will work with VT Software.

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