Making Tax Digital for VAT - Main issues for consideration

The announcements in July 2017 around Making Tax Digital now place VAT firmly at the vanguard of these proposals. The Finance Bill published on 8 September 2017 includes legislation allowing the introduction of MTD for VAT (clause 62 – as well as other clauses for income tax) and on 13 September HMRC also published further detail in a legislation overview of the VAT proposals, as well as draft Regulations for income tax and Notices. We continue our engagement with HMRC, both directly, and within the various MTD forums.

Businesses whose taxable turnover exceeds the VAT registration threshold will need to keep their records digitally, using MTD functional compatible software, and create the VAT return from that (or a combination of) software, for return periods starting on or after 1 April 2019.

The ATT takes a look at the challenges faced by businesses and their advisers.

Headline challenges

  1. Changes to record keeping - Businesses in scope will no longer be able to keep manual records. Digital records must be maintained in what is defined as ‘functional compatible software’ – broadly, software or spreadsheets (or a combination thereof) which can connect to HMRC via an Application Programming Interface (API).
  2. Changes to VAT return submission – VAT returns must be submitted to HMRC from the functional compatible software, and not by entering VAT return figures onto the HMRC portal. The precise digital mechanisms and requirements for transferring data between software is currently unclear. We understand the intention is that figures from (say) accounting software should not be manually rekeyed into another package (say) a spreadsheet, which would ordinarily deal with VAT adjustments or combination of data sources, and discussions continue with HMRC around what is reasonably practicable.
  3. Timing – MTD for VAT is expected to take place at the same time as the UK leaves the EU. Uncertainty around the VAT treatment of transactions between the UK and EU will inevitably arise, and businesses will need to both understand the tax-technical changes to the rules, and ensure that their accounting systems deal with such transactions correctly. In any event, April 2019 is less than 18 months away, which is still a challenging time frame.

Delving deeper into the detail

The table below delves a little deeper into the types of issue that MTD for VAT will create.

This table is a living document and we will update it as our understanding of MTD for VAT develops. Last updated 30 October 2017.

Current position / approach
Expected position under MTD
Likely problem areas / challenges
Maintaining your business records
Business can use manual records, spreadsheets, accounting software, or a combination of all three. 
Businesses will no longer be able to use manual records. They must use ‘functional compatible software’ (digital records) to meet the new requirements.  Digital records means a software program or programmes which can connect to HMRC’s systems via an Application Programming Interface (API).  The software must be able to:
  • Keep the required records in a digital form;
  • Preserve those records in digital form for up to 6 years;
  • Create a VAT return from the digital records
  • Provide HMRC with this information digitally;
  • Provide HMRC with additional data on a voluntary basis
  • Receive information from HMRC about the business’s compliance record.
As with the original MTD proposals, transitioning businesses from manual to digital records will be challenging. Business will need advice selecting appropriate software, though HMRC are expected to publish a list of functional compatible software (but only the software that has the ability to link to HMRC’s systems through API’s). Businesses should start planning the move to digital records sooner rather than later, getting advice from their agent where appropriate. 
Information / records to be reported / maintained
VAT-registered businesses must currently keep records of sales and purchases, a separate summary of VAT called a “VAT account”, and issue VAT invoices if necessary.
Annex 1 of HMRC’s MTD for VAT: legislation overview provides further details regarding the content of digital records. These requirements are more onerous than at present. For example, it sets out a requirement to record (for supplies made and received) the invoice total broken down into sub-totals for each rate of VAT chargeable, and the VAT charged at each rate. 
Many businesses will not currently capture this level of detail, and we have fed back the difficulties that capturing this information may cause, and queried the benefits of doing so. This requirement is currently under review by HMRC.
VAT return submission
Whilst 99% of VAT returns are filed online, only around 12% of VAT returns are currently filed direct from software. For the remaining 87%, the VAT return figures are (presumably) manually entered into the HMRC government gateway page and submitted to HMRC that way ie requiring manual input / intervention.
VAT returns must be filed directly from the digital records, such as from the record keeping software, or an API-enabled spreadsheet. Transfer of data between digital records (including spreadsheets) is currently under review, but HMRC’s preference is that this must be automated, with no manual transposition of figures.
There are only a few exceptions to this, such as partial exemption adjustments, error corrections etc, where only the total adjustment needs to be recorded in the digital records. 
Many businesses use spreadsheets or manual calculations to compile the VAT return figures. This process will need to be reviewed, and automated, to comply with the requirements. This might involve creating or purchasing new software or developing functionality to enable this automatic linkage to take place.
The level of manual intervention which can take place in relation to the transfer of information between systems is currently unclear, and we are trying to get clarity on this from HMRC.
VAT return content
There are nine boxes on the current VAT return.
There is currently no proposal for those nine boxes to change.
However, businesses will be able to voluntarily submit a specific data set of supplementary information. Further detail of this are to be confirmed, but it might represent the totals of the figures recorded at the different VAT rates as highlighted above.
The ability to provide additional information will be both helpful to businesses and to HMRC, especially if businesses can highlight reasons for fluctuations in the return.
However, we understand that businesses need to commit to providing this supplementary information on an ongoing (rather than ad-hoc) basis. There could be a perception that a business has something to hide if the voluntary additional information is not provided. The legal status of this supplementary information is currently unclear (eg for compliance / disclosure purposes etc).
Amendments and error corrections
Adjustments below certain thresholds can be amended on the next VAT return. Otherwise, a disclosure must be made on a form VAT 652.
These rules will continue as now, although HMRC is considering options for non-mandatory electronic channels for submission of a form VAT 652.
Errors in voluntary updates or supplementary VAT information can simply be corrected through the digital records (irrespective of the value) as these are not VAT adjustments under the Regulations.
Businesses will need to ensure that any adjustments which must be separately disclosed are excluded from the VAT return prepared by the digital records.
VAT groups
Individual entities can maintain their own records in whatever form they choose, and those figures are consolidated each period for the preparation and submission of the VAT return by the representative member.
As outlined above, there needs to be an automated link between the various digital records held by VAT group members, through to the submission of the VAT return to HMRC.
VAT groups will need to create or purchase new software or functionality to enable this automatic linkage to take place in order to enable the VAT return to be submitted from something the digital records.
Overseas businesses trading in the UK
As with UK businesses, overseas businesses have flexibility in how they maintain their records, and can submit returns through the HMRC portal. 
Overseas businesses that have a UK taxable turnover in excess of the UK VAT registration threshold will be subject to the requirements of MTD for VAT as outlined above.
Overseas businesses registered for UK VAT but whose UK taxable turnover is below the UK VAT registration threshold can opt in to MTD for VAT if they so wish.
It may be more difficult for overseas businesses to comply with MTD for VAT as their UK activities are likely to be just a part of a larger whole. Further, the record keeping may be undertaken in the business’s ‘home’ country and the submission undertaken from there.
Annual Accounting
Under the Annual Accounting Scheme businesses submit just one VAT return a year, and make advance VAT payments based on the last return submitted. Eligibility is turnover up to £1.35m.
Annual Accounting will be retained with the current conditions. However, the MTD requirements will otherwise apply.
See comments elsewhere.
Retail schemes
Retail schemes have their own special rules, both around record keeping requirements and calculations of VAT due.
Retail schemes users will be permitted to record electronically sales transaction data based on gross daily takings, rather than recording details of each sale. However, the MTD requirements will otherwise apply. More information is set out in the draft Notices.  
See comments elsewhere.
Flat Rate Scheme (FRS)
Businesses eligible to use the FRS account for output tax as a specified percentage of turnover and don’t claim input tax on most purchases.
Digital record keeping requirements will mirror current record keeping requirements ie FRS users must keep digital records of sales, but only need to record purchases of capital goods costing £2,000 or more including VAT.
However, the MTD requirements will otherwise apply.
See comments elsewhere.
Other special schemes
There are a number of other special schemes within VAT, such as margin schemes etc, each of which have their own record-keeping nuances.
We expect MTD the requirements of MTD to apply to business who use these special schemes, but the requirements adapted to facilitate the particular nuances of those schemes. For example, the stock book will not need to be a digital record for businesses using the second hand margin scheme.
See comments elsewhere.
Businesses that are voluntarily registered for VAT because their turnover is below the VAT threshold
They have the same record keeping and reporting obligations as businesses that are compulsorily registered for VAT.
These businesses will not be required to comply with the MTD record keeping and reporting obligations.  The existing method of filing VAT returns with HMRC will be retained for these businesses for as long as necessary.

However, these businesses can choose to enter MTD for VAT on a voluntary basis if they so wish.
We do not know when (or if) these businesses will have to comply with MTD for, although if businesses are mandated into income tax in April 2020 it is possible that the VAT requirement will be extended to voluntary VAT registrations at that stage.
Sales / purchases from the EU are fairly straight-forward and understood. Whilst there are some administrative obligations (Intrastat, EC Sales Lists), the VAT and customs position is greatly simplified. 
The position is currently unclear (which itself presents challenges). Sales and purchases of goods to and from the EU could become exports and imports and subject to VAT and duty if there is a ‘hard’ Brexit. The VAT liability of some transactions might change (eg financial services). Reporting obligations will change.
Again there are many, including:
  • Making sure businesses / relevant personnel understand the tax-technical and administrative changes caused by leaving the EU.
  • Software will need to be developed and implemented to deal with the changes, which could be challenging because a) it might not be until much nearer March 2019 when it is known what the actual requirements are and b) it takes time to develop and roll-out new software. 
At present, agents can maintain the accounting records, submit the VAT return data to HMRC etc.
An agent’s abilities should be mirrored under MTD. MTD for VAT will be part of the new Agent Services Account, currently being developed by HMRC. It is hoped that existing agent – client authorisations will be mapped over to the agent’s ASA, but the ability and mechanics of this is yet to be confirmed.
Agent functionality for tax typically lags behind taxpayer functionality. This could at least a delay in businesses participating in the voluntary trial, or at worse lead to missed returns / submissions and hence interest and penalties etc.
Non-VAT / other reporting
Only VAT is within the scope of MTD at present, so other indirect taxes (IPT, MGD etc) seem to be able to continue as at present, as does the current method of reporting statistical VAT information (Intrastat, EC Sales Lists etc).
No change, although it may be that some elements become increasingly digitised (eg Intrastat).
Businesses may have to cope with two types of accounting records / reporting, if VAT becomes digital, but other taxes / aspects are not.
Other comments
Businesses that don’t currently use software will need to buy software (and possibly hardware) to be MTD compatible. Other businesses will need to upgrade or develop bespoke systems. Businesses may also require further help from their agent, or additional internal resource, at least initially to transition to digital records, and create the automated flow of data to HMRC.
The Office of Tax Simplification is undertaking a review of VAT, and areas within the review such as partial exemption and special accounting schemes could have an impact on MTD for VAT. The OTS’ recommendations (which are due to be published on 9 November), and any subsequent implementation, will need to be carefully considered.
Exemptions / easements
Under the original proposals for MTD, charities (but not trading subsidiaries) and CASCS (and limited other organisations) would be exempt from the requirement to keep digital records and update quarterly.
For MTD for VAT, the only exemptions that will apply are those which already apply to the mandatory submission of electronic VAT returns. No other exemptions (including for charities) are currently proposed.
Once a business is required to keep digital records, this requirement remains in place even if that businesses’ turnover falls below the VAT threshold and the business remains registered for VAT – in other words, once a business is in MTD, it stays in.