Changes to Making Tax Digital for Business
You may have heard in the news that the Making Tax Digital for Business (MTDfB) initiative underwent considerable revision over the summer of 2017, with alterations to the timetable originally proposed. The government had planned to require businesses to keep digital records and update HMRC quarterly for income tax from 2018. There are now new proposals with particular consequences for VAT registered businesses.
VAT registered businesses enter MTDfB first
The headline news is that MTDfB now starts with the VAT regime instead. Businesses whose turnover is above the VAT threshold – currently £85,000 – are going to enter the regime first. This will happen in April 2019, when new rules will apply.
Further change is still possible. Primary legislation is in place to give HMRC powers to require records to be kept digitally and specify the form they are to be kept and preserved in. However, the government is currently running a consultation on the detailed VAT regulations which means there may be changes to some of the detail.
HMRC will be running an initial pilot scheme for MTD for VAT starting later this year, with a wider pilot in 2018. The intention is for the necessary VAT regulations to be in place by at least April 2018, allowing software houses and businesses alike a year to plan for the change.
As regards income tax, the government has said that keeping digital records and providing quarterly updates will not become mandatory before at least April 2020 – although it will be possible to start using the MTDfB regime voluntarily earlier than this.
Going digital: who and when
What the proposals mean in practice is that businesses operating above the VAT threshold will have to use a form of digital record keeping, and have to submit VAT return information to HMRC via MTDfB compatible software.
The requirements will remain in place even if such businesses subsequently fall below the VAT threshold, ceasing only on deregistration.
Digital record keeping will be mandatory from 1 April 2019, and submission of VAT returns becomes digital for return periods starting on or after 1 April 2019. When MTDfB was first proposed, the idea had been to align VAT and income tax submissions, but for now at least, there is to be no change to the VAT return or payment dates.
Any business operating below the VAT threshold, which has registered voluntarily for VAT, will also be allowed to use MTD for VAT, but will not yet be mandated to do so.
Under the new MTDfB rules, businesses will have to use ‘functional compatible software’. This means a ‘software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)’. This must be capable of:
- keeping records in digital form as specified by the new rules
- preserving digital records in digital form
- creating a VAT return from the digital records held in compatible software and submitting this data to HMRC digitally
- providing HMRC with VAT data on a voluntary basis
- receiving, via the API platform, information from HMRC to ascertain compliance. It is as yet unclear what this means, but it may relate to HMRC’s ability to send compliance prompts and nudges.
Use of spreadsheets
Many businesses currently use spreadsheets as part of their VAT records. There is no reference to spreadsheets in the proposals, and it is likely that business using spreadsheets will need add-on submission software to comply with the MTDfB requirements.
Discussing software products in a recent webinar on MTDfB, HMRC suggested that spreadsheets could be used for book keeping and record keeping, but that businesses would have to ensure that these met all MTDfB requirements, including the ability automatically to send digital updates to HMRC. This, HMRC said, ‘is likely to involve combining spreadsheets with another software product.’
Helping with the challenges
Whatever the size of your business, there is a time of great change ahead, and we are on hand to help with the challenges. Even though part of the MTDfB programme has been delayed, the government is still fully committed to its implementation.
VAT registered businesses will be the first to experience change, and because of the short timescale, there could be initial teething problems as HMRC and the software houses produce a workable solution.
Although we are still waiting for more detail from HMRC and the software houses, there are issues that VAT registered businesses would do well to consider now. One key area is whether business transactions are currently recorded digitally. If they are not, consideration should be given to recording some/all transactions on a digital basis.
We would be happy to help you with any issues arising from MTDfB. We would also be able to undertake bookkeeping services for you to enable you to comply with the requirements. As further details about MTDfB emerge from HMRC, we will of course continue to keep you up to date.
More detail on the MTD proposals for VAT
- Preservation of records
- Content of records
- The VAT account
- VAT schemes
- VAT returns
- Error corrections
Just as there are exemptions from electronic filing at present, there will be some exemptions from the MTD for VAT regime, and these follow the same lines. They are for businesses:
- which satisfy HMRC that they are practising members of a religious society or order whose beliefs are incompatible with the use of electronic communications
- to whom an insolvency procedure applies
- which satisfy HMRC that for reasons of disability, age, remoteness of location or any other reason, it is not reasonably practicable for them to make a return using an electronic return system.
The rules will provide a right of appeal if HMRC refuse exemption.
Preservation of records
As well as keeping digital records, businesses will have to preserve them in digital form. They will have to preserve digital records in functional compatible software for up to six years. Where a business deregisters for VAT, it will have to preserve records for up to six years.
Content of records
The information to be kept and preserved digitally includes:
- ‘designatory data’: this is business name, principal place of business, VAT registration number, information about any VAT accounting schemes used
- VAT account linking primary records and VAT return
- information about supplies made and received
The VAT account
The following data will be kept digitally.
VAT payable portion:
- total output tax due for VAT return period
- total output tax on acquisitions from other EU member states
- total output tax on supplies received where the business is required to account for and pay on behalf of the supplier (reverse charge output tax).
VAT allowable portion:
- total input tax allowable for VAT return period
- total input tax allowable on acquisitions from other EU member states.
Adjustments made, corrections of errors in calculating VAT payable in previous periods, and any other adjustments made as required by VAT rules (such as retail scheme annual adjustments or partial exemption annual adjustments).
Here however, it is only the total of each adjustment that needs to be kept digitally – not the underlying calculations.
Retail scheme users will be allowed to record electronically sales transaction data based on daily gross takings, rather than recording details per sale.
Flat rate scheme users will need to record the relevant information in a digital form but the extent of the records will mirror current record keeping requirements.
There will be a minimum of nine boxes to complete the return. The information on the return will ‘be generated by pulling information from the digital records’ – a hands-free process.
There is also provision for businesses to make voluntary ‘periodic updates’ – in other words, for them to supply information outside the VAT return cycle.
The exact position is not yet completely clear, but HMRC say ‘We expect a voluntary update outside of the VAT Return cycle to be used mainly when a business is also providing an Income Tax update.’ This presumably looks forward to a next stage in MTDfB, when the regime also encompasses income tax. HMRC then goes on to say, ‘But it could also be used for example to update HMRC about a change of circumstances (changes to ‘designatory data’).’
Change is hinted at by provisions for submitting additional supplementary information, which would also be ‘pulled’ from the digital records.
The proposals state ‘While the simplicity of the ‘Nine Box’ VAT return has advantages for businesses in terms of reduced administrative burdens … HMRC receives no information about how the figures in the return are arrived at.’
HMRC are concerned that some returns are incorrectly calculated, and one of the driving forces behind the MTD programme is the belief that the digital regime will reduce the amount of money lost to the Exchequer through error. The idea of submitting ‘supplementary data’ would seem to relate to this. HMRC say submission ‘will allow HMRC to test with businesses the extent to which they and HMRC can benefit from such supplementary data.’
The procedure here will broadly be the same as at present with regard to amending VAT accounting records. Corrections to VAT returns already submitted will be made as at present, with non-deliberate errors below the reporting threshold adjusted on the next VAT return, (if within the four year time limit) and other errors reported through VAT652.
Here too change may be on the way. However, HMRC are exploring the provision of electronic/digital submission of VAT652; at this stage on a non-mandatory basis.