The VAT regulations are crucial to the operation of MTD for VAT, but they appear to have been passed with undue haste and with little attention paid to the many points raised during the consultation period.
The consultation on the draft MTD for VAT regulations closed on 9 February 2018, and all the major accountancy bodies made detailed representations. Here at AccountingWEB we fed in members’ comments, which I summarised on the closing date. Just 18 days later the final version of the VAT regulations (SI 2018/261) was laid before Parliament and passed with no debate in either House on 28 February. The regulations will come into force on 1 April 2019.
What has changed?
I have compared the final VAT regulations and the draft version so you don’t have to, and found only two significant changes from the draft to the final regs:
- In reg 6: the VAT records (the electronic account) must be preserved using MTD functional compatible software unless the trade is exempt from the MTD regime.
- In reg 7: the rules which determine what information must be kept and maintained for each transaction can be varied by HMRC if it is satisfied that the complying with the regulation is likely to be impossible, impractical or unduly onerous.
What is not there
HMRC released a pack of slides with the draft VAT regulations which indicated that businesses would be able to mix and match accounting software in order to meet their obligations to keep digital records and submit VAT returns.
The regs said that “functional compatible software” (that MTD-compatible software) means a software program or set of compatible software programs. In the slide pack HMRC refers to “bridging software” which is not mentioned in the regs, unless we read that to be a component of a set of compatible software.
Accountants and software providers need detailed guidance from HMRC on what can make up a set of software, and specifically whether this can include spreadsheets. We also need to know what relationships must exist between the software programs to allow each program to be part of a set.
The HMRC slides indicate that data could be transferred between the software programs by non-digital means (manually), but only for a limited “soft landing” period ending in April 2020. This point was also emphasised in the HMRC webinar on MTD for VAT.
HMRC appear to believe that within a relatively short period of time all the problems of communicating between different software packages will be solved, and all businesses which are mandated into MTD will have updated all of their accounting software to make it MTD-compatible.
In commentating on the draft VAT regulations the CIOT said the “soft landing” for digital links should be prescribed by law, and it should be included in a part of the VAT Notice which has the force of law. HMRC should also provide some consistent examples of what it means by “digital links”, “software program” and “electronic form”.
The VAT regulations require the business to record how much VAT will be allowed as a credit for each purchase. This is straightforward if the input VAT relates entirely to taxable outputs. However, where the business makes exempt supplies only a proportion of the input tax will be permitted as an input credit.
The MTD for VAT regulations take no account of partially exempt businesses which have to calculate their input credits after the end of the VAT period and may need to adjust that input credit after the end of the accounting year.
The VAT regs also require the business to record “the proportions of the total of the VAT exclusive value of all outputs for the period which are attributable in each case to standard rated, reduced rated, zero-rated, exempt or outside the scope outputs.” However, there is currently no requirement to record income which is entirely outside the scope of VAT, and recording such income will add complexities for charities.
The CIOT made a strong recommendation that the requirements of MTD for VAT should exactly mirror the existing VAT record keeping requirements, at least until MTD is bedded in. Otherwise, not only will businesses need to change their practices for digital record keeping and reporting, they will also have to make changes to their accounting systems to capture the additional information needed for MTD.
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.