MTD: VAT regulations have been passed

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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.

Guidance needed

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. 

Outstanding issues

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.

Replies

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06th Mar 2018 18:35

Thank you.
That sounds quite complicated. I have some supplies where no VAT is charged or chargeable (and quite a lot of purchases too - from printers).

I htink HMRC should start soon in listing the cheapest products which are compliant so we can start taking a look at them well in advance. My records are basically paper records.

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07th Mar 2018 08:41

I have some clients who use Sage Instant Accounts. The VAT Return is then submitted through HMRC portal. How can it be right they are forced to buy subscription software to meet new requirements when their current method is already all-digital?

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07th Mar 2018 09:28

I'm not worried. With HMRC's track record on IT, and the fact that they don't listen to constructive responses. Added to the fact that they will struggle to get IT contractors in to work on the software in the first place with IR35 threats, I don't think this has a hope in hell of rolling down the runway, let alone flying.

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to SteLacca
07th Mar 2018 18:34

I am sure they will be ready but as they haven't thought about specifying how the 'bridges' will work, nobody else will.

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07th Mar 2018 11:00

"...but they appear to have been passed with undue haste and with little attention paid to the many points raised during the consultation period. "

Of course this abortion has been rushed!

The day that ANY Government organ pays any real attention to cogent, well thought out and valid points raised in ANY "Consultation" process, is the day Satan and his fallen angels play snowballs and take up ice skating!

As always, such consultation processes are simply a whitewash, aimed at trying to engender a sort of comfort zone in the responders.

My core question, now, is where can I obtain a software package, let's call it MTD Lite, which will handle the VAT module only and participate in the Alpha, Beta and Gamma testing phases?

Idiot MPs, Secs of State and Ministers, plus senior Mandarins, couldn't actually run a hamburger stall at a profit: yet, they are empowered to take paradigm shift decisions on topics, (ICT in particular) about which they know zero.

No wonder this once great nation state is in such a dystopian mess...

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By 0098087
07th Mar 2018 11:06

Incompetent Government. No idea about what's going on, but then when you have someone like David Davis negotiating Brexit what do you expect. Shambles. Country heading down the toilet.

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to 0098087
08th Mar 2018 11:50

General derogatory political comment does not belong in this forum.

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By 0098087
to leon0001
08th Mar 2018 12:16

Sorry but in this case I feel it does. All down to George Osborne and his little pet project. Did you know he wanted HMRC to take over the running of all payroll. Shows how little he knows about practicalities and this MTD was of course his little project as well before he was ousted as Chancellor. It's all down to politics.

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07th Mar 2018 11:11

Small client base with all above average IQ and qualifications. All on cloud software. All on VAT.

Every single VAT period constant questions on errors they created and how to fix. I dread MTD. Despite their superior intellects (and IT qualified in many cases too) its a mini disaster each VAT period.

How in heavens MTD will work with the ordinary run of the mill business I do not know (I do actually. A disaster in bookkeeping and a nightmare for accountants).

Comments mde on training your clients. The last thing they all want to do is bookkeeping. They o not want training. They want it to go away whilst still being compliant.

The idiots in Parliament and the arrogant self serving manderins at HMRC have no idea. The plumber does not want to become an expert in accounting software and bookkeeping. He wants to do plumbing and make money. Accountants, bless us, will try to help but there is only so many hours in the day and in any event I doubt we enjoy fixing errors all the time especially when HMRC makes everything so complicated we must first read the manuals in detail (and of course learn them of by hard) to process things correctly.

My current nightmare is bank feeds and cloud software. Spent 2 days now sorting two clients [***] ups out (or maybe it was the software. Who knows).

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By ShayaG
to richardterhorst
07th Mar 2018 12:30

"How in heavens MTD will work with the ordinary run of the mill business I do not know "

Cloud. But you're absolutely right, this is a pig's breakfast.

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to ShayaG
07th Mar 2018 12:34

It won't.

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By 0098087
07th Mar 2018 11:21

And they don't understand why it's needed and we all agree!!

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07th Mar 2018 11:23

Quite simply, I am retiring this year. I wonder how many other older practitioners there are out there who are thinking the same thing. I am sure the younger generation will see it as an opportunity but my clients are not happy at having to change when I have looked after some of them for up to 20 years.

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07th Mar 2018 11:38

HMRC must have tried some sort of software out with some business. It would be good to get a bit of feedback from them so that if there are problematic areas we can deal with them when we all start the pilot in April.

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to johnjenkins
07th Mar 2018 14:00

I spoke last week to one software company to see whether they would be ready for the pilot in April. They referred me to HMRC. No one seem to have a clue what they are doing!

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to Chipette
07th Mar 2018 16:14

Now there's a surprise.

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07th Mar 2018 11:44

Porcine aviation alert!

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07th Mar 2018 11:59

Extract above
'The regulations will come into force on 1 April 2019.'

Its going to creep up on us.

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07th Mar 2018 12:02

Extract above
'was laid before Parliament and passed with no debate in either House on 28 February.'

Seems to me no-one wants to be associated with this nonsense.

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07th Mar 2018 12:04

This:

"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.” "

Could cause some problems, although it would be hard to penalise you if you get it wrong so long as the VAT is right.

Thanks (3)
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to ireallyshouldknowthisbut
08th Mar 2018 11:41

In most cases, the value of an outside the scope output must be £nil. A transaction may have a value but if it is outside the scope of VAT how can it be included in the definition of an output?
Consequently this can only refer to the values of specific outside the scope invoices which are already required to be included in the return outputs total. (e.g. services invoiced to a business which does not belong in the EU).

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07th Mar 2018 12:04

There is no definition of a digital link, and HMRC will not be enforcing it anyway. So I might well just ignore it, and carry on using good but non-MTD software such as TAS and VT, then copy the VAT totals manually to a cheap MTD compliant system for submission. HMRC will not be aware of this, probably wouldn't care anyway, and even then any penalty for technical non-compliance would be a fraction of the cost of complying! Furthermore, is cut-and-paste a digital link? If so, I'll just do that to copy the figures!

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By ShayaG
to JDBENJAMIN
07th Mar 2018 12:45

Cut and paste is not a digital link, but I fully sympathise with your position.

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to ShayaG
08th Mar 2018 11:44

But you have to use your fingers.

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to JDBENJAMIN
19th Mar 2018 12:24

some would suggest that was unprofessional and not expected of an institute member?

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07th Mar 2018 12:19

Are not fingers and toes called "digits"?

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By ShayaG
to johnjenkins
07th Mar 2018 12:37

My feelings exactly. Click a button to refresh a database query - that's compliant. Type 9 numbers extracted from one system into another - illegal. It's completely none of the government's business how I structure my accounting processes.

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By ShayaG
07th Mar 2018 12:35

I used to be an MTD proponent, but having now seen that the thrust of the legislation is basically to force people to use commercial products, and supply *exactly the same* 9 boxes information to HMRC as it did beforehand, I am more than disappointed.

MTD solves no problems, and creates plenty of new ones.

This whole process has been driven by cloud evangelists in an unhealthy relationship with a weak government starry eyed about boosting the tech industry.

It's an inappropriate use of the state's power over business owners for private commercial gain.

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07th Mar 2018 13:17

HMRC Please read this. All Accountants know the country needs money raised by taxation. So having got a basic plan why dont you hand it over to them to implement?

One again another dogs breakfast created by people who are not businessmen or women (the majority of those who submit vat returns.). Sacking a load more people in your department would mean that there are less people who want to have there say/ look good at their bosses. In the end the sole purpose is to collect £x so let us Accountants devise an effective and simple solution.

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07th Mar 2018 13:35

I do VAT return for a Fishmonger, so no vat on sales, 1 man company, currently do accounts on very old version of sage, I am finding the whole prospect of having to do MTD just a bit overwhelming.

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19th Mar 2018 12:26

just upgrade sage... take you 5 minutes - client pays the cost

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By ShayaG
to Tom 7000
21st Mar 2018 17:06

Client pays the cost is wishful thinking

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By 0098087
to ShayaG
21st Mar 2018 17:29

Client pays. We have one client. Earns over 100k a year. We charged him £80 for his yearly payroll. He moaned. And you think they'll pay. Dream on. I wouldn't advise anyone to go into private practice now. Madness

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By 0098087
07th Mar 2018 13:41

we have clients who write their income and expenses in manual cash books and don't use a computer. Why should they change and also pay for software?

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to 0098087
19th Mar 2018 12:28

Because they get fines if they don't. Dragged kicking and screaming into the computer age one way or another.

Your job is to explain nurture train and bill them for the pleasure of assisting.

So off you pop on your xero training course so you can show them :)

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to 0098087
19th Mar 2018 12:29

:)

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By KH
07th Mar 2018 15:23

I don't understand this "digital" bit ... everything that I can see starts off as "manual" ... writing a cheque, inputting bank details into an online bank account in order to transfer money, typing invoices etc into a bookkeeping package, inputting sales' data into on online accountancy package, pressing a button on a camera to capture a digital snapshot, etc etc etc ... so why the emphasis on the "digital" end bit, when any errors are already well embedded into the bookkeeping by that time?
If "manual" data entry is not allowed, then who will be able to maintain any bookkeeping records?
If manual entry is allowed, then why only at the beginning of the process?
Or are errors only ever made at the end of the whole bookkeeping process?
I just don't get it. Must be thick..........

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to KH
07th Mar 2018 17:33

Indeed (or I suppose by voice which types for you but even that is manual when automatically typed or said into a voice product).

The reason they like the digital method is presumably their ultimate aim is open banking (in every sense) and automatic payment perhaps even weekly to HMRC of tax and VAT as the self employed are paid and earn. HMRC think it will mean more people declare all their earnings I suppose although many of us already do and have perfectly good but different systems.

i can see a couple of people below suggesting one might keep existing systems and then 4 times a year use some cheap software product to pass over the 9 boxes HMRC want completed on a VAT return or whatever it is (which would not comply with the rules I would imagine). So I suppose doing that you sit down 4 times a year and type into the cheap digital product you've just bought for £98 one invoice of your VAT chargeable supplies for the whole of your invoiced amount and one for your expenses having totalled them up as now. Digital product takes on board those two figures - your spending and your income and then does the automatic thing HMRC want 4 times a year to generate the VAT return. That will mean you can submit the VAT return (they will be switching off everyone from submitting in Aptil unless they have the new digital product) but of course it is compeltely not what is allowed even if the figures generated are accurate and possibly more accurate than if you had been using cloud based software.

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By DJKL
07th Mar 2018 15:34

Dear Ms Brock,

I note that the governments legislation re making vat digital (http://www.legislation.gov.uk/uksi/2018/261/contents/made) was waived through both houses and received assent on 28th February 2018, without debate, despite representations requested and made by the professional accountancy and tax bodies (No idea why you were all so blase about legislation that is going to impact so many of your voters, but that was the call of MPs to make, so on your heads be it.)

Accordingly this now goes live for vat quarters starting from 1 April 2019. As vat registered entities will likely not wish to use two different accounting systems re one year's accounts that in effect means any business with a 30 April to 28th February year end will likely need to change software provider/ adopt using software before their next accounts year starts , so the first of these is likely 1 May 2018. As I believe no commercial software is yet available, in fact HMRC have yet to produce a working system for the software providers to trial their interfaces through, this is going to be a very interesting process to observe.

I accordingly now require to write to all my impacted clients, as likely will all accountants, to advise them about the changes in the law our MPs have now implemented. There is not a lot we can yet say to them re how they may comply with the legislation accordingly I am intending to give each a note of their local MP's contact details (most of my clients are Edinburgh based) so they can contact for advice those they elected who passed such hurried, rushed and ill conceived legislation.

The SNP and yourself cannot claim being unaware of the legislation, I wrote to you and the other parties last year (as did many accountants) re the folly of the government's position, as you passed the legislation with no debate you are all now equally complicit.

Yours sincerely,

Anything in above factually incorrect that I ought to modify?

Thanks (8)
07th Mar 2018 15:56

I have got very efficient and accurate systems already in place for all clients. By far the most challenging are those on the Cloud, where usually what is initially presented to me is a Xero or QBO bank balance is at least £10k different to what is actually on the bank statement.

This applies whether the client is a small trader or a very internet savvy cyber security expert with over £300k in sales.

NO WAY are HMRC going to make me wreck things for all my other clients where everything is fine!!

NO WAY!!!

There may be an extra cost for some clients but it will be the marginal cost of whichever cloud system offers me the cheapest price for keying in 4 or 6 numbers every 3 months and pressing submit.

HMRC can keep their bluddy idiotic drivel and stick it right up their pig-headed arzzes!

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to mr. mischief
07th Mar 2018 21:30

B-b-but cloud software makes everything simple and there are no errors.....!

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07th Mar 2018 16:31

Like a rabid dog with a bone, this dumbness of sticking to an unworkable system moves one stage further to thicker {sic } legislative manuals.
Of course both House passed it through - just like they would with a dodgy curry. These cronies haven't a clue of what MTD is about and how the people they are supposed to serve will suffer.
At least Cameron put the country to the vote , rather than this bunch of wasters in Parliament, on another dumb ill thought out proposal - but look what a fine mess that has become without presenting the FULL implications and considering the FULL impact.
And do we need reminding of a certain senior H M Govt. official heavily involved with the inception of MTD who has since left the Revenue department to become a big player with a major software company ?
There's a certain stench about this particular legislation.

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07th Mar 2018 16:42

What is also extremely depressing is the fact that this all moves ahead in the face of a barrage of criticism from the professional bodies. I read the CIOT responses, and those of the ICAEW. Both made very good points, but what's the point of inviting a response if they are going to be ignored?

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By DJKL
to Jo Nokes
07th Mar 2018 17:35

The point is to have a veneer of having consulted.

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to Jo Nokes
19th Mar 2018 12:33

what DJKL said, they just ignore it, same with autoenrolement when I went to Westminster ''talks'' years ago....

smile nod and get on with it...

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07th Mar 2018 19:06

Captain Smith ignored all the warnings and it seems to me that the Titanic still sank. Yet the Titanic, in any reasonable assessment, had a much greater chance of missing the iceberg altogether than HMRC do of making this utter shambles called MTD actually work next year.

Accordingly I am targeting 20 March 2019 or so to communicate things to my client base.

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08th Mar 2018 14:38

Thanks, Rebecca, for a very useful article.

You refer to the new addition to 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 fact what the new reg says is that the obligation to preserve the records in that way does not apply to a person to whom "the requirements of regulation 32A have ceased to apply".

Surely the requirements will not have "ceased to apply" to a trader who was exempt and therefore never subject to them, so the let-out can't apply to them.

The wording they've used seems strange!

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12th Mar 2018 08:50

I read that the regulations require _each transaction_ to be digitally recorded. That would be totally impractical in a retail scenario that doesn't already use digital/computer based POS systems. Cashing up an electronic till and recording the daily/weekly totals would seem to be non-compliant.

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to Brian Gooch
12th Mar 2018 11:09

How do they define a transaction?

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to leon0001
13th Mar 2018 11:20

They refer to each supply:
"for each supply made within the period—
(i) the time of supply,
(ii) the value of the supply, and
(iii) the rate of VAT charged;
......
where more than one supply is recorded on a tax invoice and those supplies are either—
(i) supplies made which are required to be accounted for in respect of the same prescribed accounting period and are subject to the same rate of VAT, or
(ii) supplies received for which credit is allowable in the same prescribed accounting period,
they may be treated as a single supply"
So that would be each separate sale should be recorded, but only if qualifying tax invoices are issued, otherwise each individual supply within that sale should be separately recorded.

The requirements can be varied by direction in respect of retail schemes (Part 9) or other cases where keeping such records would be "likely to be impossible, impractical or unduly onerous".
It would be nice if such directions were published sooner rather than later!

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