Making Tax Digital: Understanding the detail

14 September 2018

In the first of our blogs on Making Tax Digital, coming into effect for VAT in April 2019, we looked at what has happened since HMRC announced its MTD rollout and what you can do to prepare for the changes. In our second blog, Nigel Roberts, Johnston Carmichael’s Head of Indirect tax looks in more detail at how to work out if you are caught by the new regime and what to do if you are.

HMRC released its detailed guidance on the introduction of Making Tax Digital (MTD) for VAT in July. Although there are still some unanswered questions, taxpayers now have a reasonably clear picture of what they will need to do to meet the requirements and can start to plan sensibly. What are the key things you need to know?

Who’s in?

You will be within the MTD regime from 1 April 2019 if you are VAT registered and your taxable turnover (essentially everything that’s not VAT exempt) is above the VAT registration threshold (currently £85,000). If you’re VAT registered on a voluntary basis and your taxable turnover is below the threshold, you don’t have to meet the MTD conditions, but you can join voluntarily, and you’ll have to keep an eye on your turnover. There are also some exemptions where digital record-keeping is not possible or practical for religious reasons or because of age, disability or remoteness.

Digital record-keeping and compliant software

Once caught by MTD, some business records MUST be kept digitally in what’s snappily called ‘functional compatible software’ (FCS). This is software (or a set of software) that can record and preserve digital records and send and receive VAT return information to HMRC digitally via a special link known as an Application Programming Interface (API). FCS can be a single off-the-shelf package or built piecemeal from existing systems. Some off-the-shelf packages will include the capability to submit returns via the API, but where you use existing accounting software or spreadsheets that don’t have this capability, you are likely to need to purchase a digital tool known as ‘bridging software’ that will enable you to link digitally to HMRC’s systems.  HMRC has issued a list of software providers that can or will offer either MTD compatible systems or API software.

Digital links

One of the key drivers for MTD from HMRC’s perspective is the reduction of manual intervention in the VAT return process. Data transfer between records that are required to be kept digitally will have to be done via digital links – manual copying or a straightforward cut and paste will not be acceptable.

Should all records be kept digitally?

Not all records must be kept and linked digitally. The full details are set out in HMRC’s guidance, but in broad terms, you must keep a digital record of the business name, address, VAT number and any VAT accounting schemes used. You will also need digital records of all supplies made (tax point date, value and rate of VAT), supplies received (again, tax point date, value and amount of recoverable VAT) and must keep a summary of the data shown on the VAT return. There are detailed rules governing several special VAT schemes – for example, partial exemption and flat-rate calculations which can be maintained outside the digital records.

HMRC also expect to update MTD over time to allow businesses to make updates voluntarily and provide supplementary data in relation to VAT returns.

The ‘soft landing’ for digital links

HMRC recognise that it may take time for businesses to fully implement the rules on digital links, so full compliance will not be required until VAT return periods beginning from 1 April 2020. This does not affect the digital submission of returns via API, or the requirement to maintain records digitally from 1 April 2019.

What about accountants?

If you use an accountant to prepare or submit your VAT return or do your books, the MTD provisions will still apply. You or your accountant will need to meet all the digital record-keeping requirements if you’re above the turnover threshold and your return will still be submitted digitally.

What next?

Even with the benefit of a ‘soft landing’, there is still a lot of work to do between now and next April. Where to next? Here’s a checklist:

  • Confirm whether you are, or will be, caught by the MTD rules
  • If you are, make sure you understand the digital record-keeping requirements – read HMRC’s guidance and talk to an advisor
  • Review your current records – will they meet the April 2019 requirements and if not, where are the gaps?
  • What do you need to do to become compliant – can you adapt your current records, or should you move to an off-the-shelf solution? Is now the time to consider outsourcing your record keeping to an accountant who can ensure you’re compliant?
  • Think ahead to April 2020 – will you be able to meet the digital link requirements once the ‘soft landing’ period has ended? What are your options – is it worth biting the bullet now and ensuring you will be fully MTD compliant from the start?
  • Take advice – there is a lot more detail in HMRC’s guidance that can’t be covered here and things may well change as April 2019 approaches. If they do, we’ll keep you informed!

For help with MTD compliance, get in touch with me, Nigel Roberts, or another member of the VAT team now.