The global tax landscape is changing. Tax authorities around the world are exploring how technology and digitisation can transform their work and the tax compliance landscape. The 21st century might still be waiting on the flying car of the Back to the Future films but the impact of technology isn’t just prevalent in the mega trends in finance, it’s also reaching into the world of tax
In the United Kingdom (UK), HM Revenue and Customs (HMRC) has kicked off the first stage in making tax digital for business with the introduction, from 1 April 2019, of making tax digital for value added tax (VAT). The Making Tax Digital project is just one element of HMRC’s digital transformation project. (We’ll refer to this as MTD for VAT throughout this article.)
MTD for VAT – who is affected?
The regulations introducing MTD for VAT came into effect on 1 April 2019. They apply to any VAT-registered business with a taxable turnover exceeding the VAT registration threshold (currently £85 000). The rules apply to the first VAT return period commencing on or after 1 April 2019 unless the business has received confirmation from HMRC that the start date is deferred to 1 October 2019.
If, after 1 April 2019, taxable turnover falls below the VAT registration threshold the business must still meet the requirements of MTD. However, this won’t be required if the business either:
- Deregisters from VAT (the current deregistration threshold is £83 000), or
- Meets certain other exemption criteria (see below).
MTD for VAT – six-month deferral
A six-month deferral of MTD for VAT until 1 October 2019 is available for certain businesses ‘with more complex requirements’. Businesses who have received a deferral letter from HMRC are not mandated to use MTD for VAT until the first VAT return period commencingon or after 1 October 2019.
The specific categories of businesses classed as more complex are as follows:
- Not for profit organisations (which have not been established as a company)
- VAT divisions
- VAT groups
- Certain public sector entities (those required to provide additional information on their VAT returns)
- Local authorities
- Public corporations
- Overseas traders
- Businesses making payments on account, and
- Annual accounting scheme users
MTD for VAT – exemption criteria
Exemption from MTD for VAT must be applied for and is only available if:
- It’s not reasonably practicable for the business to use digital tools to keep business records or submit VAT returns because of age, disability, remoteness of location or any other relevant reason
- The business is subject to an insolvency procedure, or
- The business is run entirely by practising members of a religious society/order whose beliefs are incompatible with using electronic communications / keeping electronic records.
A business is also not required to operate MTD for VAT or to apply for an exemption if it’s already exempt from filing VAT returns online.
MTD for VAT – what is needed?
First, the deadline for submitting VAT returns and paying VAT is unchanged. The regulations which implement MTD for VAT (The Value Added Tax (Amendment) Regulations 2018) contain two core requirements which must both be satisfied. VAT Notice 700/22 and the regulations set out each requirement in more detail.
- Digital record keeping – for the first time, businesses are required to keep and preserve certain digital records. All VAT registered businesses must already keep and preserve certain records and accounts – these are set out in VAT Notice 700/21. Under MTD for VAT, some of these records must now be kept digitally within functional compatible software. Full details of these are contained in VAT Notice 700/22.
Electronic filing of VAT returns – to submit a VAT return, businesses must, for the first time, use information stored in their digital records combined with ‘functional compatible software’ to submit VAT returns directly to (and receive responses from) HMRC. ‘Functional compatible software’ is specifically defined as software which keeps the mandatory digital records, calculates the VAT return and submits it to HMRC. Submission must be via an application programme interface (API). An API is basically a piece of software which acts as a go-between and allows two different software applications to talk to and interact with each other.
The software industry has responded to the introduction of MTD for VAT by developing a range of options to meet the software requirement, including bridging software and API enabled spreadsheets.
MTD for VAT − penalties
The change to MTD for VAT may mean businesses are exposed to penalties for filing late, record-keeping deficiencies or errors made as a result of the two new requirements.
HMRC have announced that it will adopt a ‘light touch’ approach if a business ‘does their best to comply’ with the two core requirements; in that instance only will no filing or record-keeping penalties be issued.
A year-long ‘soft landing’ period has also been announced. During the relevant ‘soft landing’ period only (that is, the first year from either 1 April 2019 or 1 October 2019), where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.
The current VAT default surcharge rules will operate as normal until April 2021 with no ‘soft landing’ period available. After that date, a new points-based system of late submission/payment penalties is expected to be introduced. The proposed new penalty regime has yet to be enacted in legislation and was not contained in the Finance Act 2019.
MTD for VAT – agents
Where a business must use MTD for VAT, it can authorise HMRC to receive data from (and send data to) an agent on its behalf. Once authorisation is complete, the agent can sign the business up to MTD for VAT and use software to create, view, edit and send the necessary data to HMRC. The agent may also keep and maintain digital records on behalf of the business.
If a business has previously authorised HMRC to receive its VAT return from an agent they can still do this. Agents will not need to be re-authorised to act for a client in respect of MTD for VAT where they already have an existing VAT authorisation in place.
In order to act for authorised clients, agents will need to sign up to a new agent services account to use MTD for VAT on behalf of their authorised clients. The agent must also have software of their own or have access to the software that holds the digital records of the business.
MTD − other taxes
MTD will be extended to other taxes, including income tax and corporation tax. At the time of writing, the planned start date is not clear, but it has been delayed and will be after April 2020 to allow HMRC to focus on other priorities. When it does commence, it is planned that MTD will take effect for income tax from the first accounting period beginning after 5 April of the relevant tax year that it is introduced.
There will be some limited exemptions available from MTD for income tax and corporation tax; however, the exact detail of these is yet to be finalised. Currently, businesses with an annual turnover below a set amount (£10 000 has been suggested) and anyone unable to engage digitally is likely to be considered for exemption from this element of MTD.
Once again, digital record keeping will feature and this will be coupled with the requirement for quarterly update submissions to be made to HMRC followed by a final ‘end of year’ submission. The deadline for making quarterly submissions will be the end of the following month after the quarter end date.
The final submission for an accounting period (which will be used to essentially finalise the taxable position of the business for the relevant accounting period) will be due on the earliest of either:
- Ten months after the last day of the period of account, or
- 31 January thereafter
The MTD project represents the most fundamental change to the administration of tax in the UK for many years. Businesses and agents should review their processes and systems to ensure they are equipped to meet the core fundamentals of MTD for VAT before the deadline for filing the first affected VAT return after commencement. In the longer term, MTD for other taxes will mean further significant change.
This article was originally published in the June 2019 issue of ASA.