5 July 2018

Making tax digital - are you ready?

With the MTD deadline for VAT returns looming, are you prepared?

From 1 April 2019, anyone who is VAT registered with income above the VAT threshold, will be required to file their VAT returns through compatible software. The current online portal (Government Gateway System) will not be available for affected VAT registrations from this date. This will affect sole proprietors, companies, LLPs, public sector bodies and charities.

Commonly used software houses are working to ensure their packages can enable this change and if you are currently using older versions of accounting software or spreadsheets, you may need to consider upgrading or moving to online accounting.

Background

Making Tax Digital (MTD) is part of the Government’s plan to improve the efficiency, effectiveness and ease of tax compliance. The Government wants to have a more modern, digital service which will help businesses get their tax right, with technology making it easier for them to do so.

Despite 99% of VAT returns being submitted online at present, only 12% of these are submitted via 3rd party software. This suggests that the remaining 87% of VAT returns are submitted manually via HMRC’s Government Gateway. From 1 April 2009 HMRC will not allow businesses with turnover above £85,000 to submit their VAT returns via their current HMRC online portal.

The Government hopes that by digitising as much of the process as possible, HMRC will be able to reduce the amount of tax that is lost every year as a result of transpositions and human errors. This is estimated to be over £9bn per annum.

HMRC has stated that there will also be benefits to business including greater transparency – businesses and individuals will be able to see what information HMRC already holds, check their details and access more tailored services.  Taxpayers will also have increased flexibility in how they communicate with HMRC with options such as webchat and secure messaging.

HMRC’s current online portal will still be available to all other VAT registrations that have turnover below the VAT threshold. Those registrations can, however, use the new digital system voluntarily.

MTD for VAT will apply to VAT return periods commencing on or after 1 April 2019 and registrations will be required to calculate their VAT returns via functional compatible software packages. They will need to submit returns to HMRC via an Application Programme Interface (API). The software must be able to keep all records in digital form however registrations can still use spreadsheets as long as they are combined with the recommended software. HMRC states that digital records do not have to be in one piece of software and if there is a digital link between the pieces of software, records can be kept in a range of compatible digital formats.

There is a lack of clarity from HMRC around how to digitise information held in spreadsheets and we believe that this is a perfect opportunity to review how you record your financial information and consider an online package such as Xero. One of the many benefits to online accounting is the facility to collaborate and share information securely with your accountants and advisers. Through an online system we can help clients through the new VAT process.

What is considered 'functional compatible software'?

HMRC has stated that 'functional compatible software' is a software programme that must be able to:

  • Record and preserve records in an electronic form;
  • Provide to HMRC information and returns from the electronic records in an electronic form using the API platform and;
  • Receive information from HMRC.

For each supply you make you must be able to record;

  • The time of supply;
  • The value of the supply and;
  • The rate of VAT charged.

You must also have a record of the outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.

For each supply you receive you must be able to record;

  • The time of supply;
  • The value of the supply including any VAT that is not claimable by you;
  • The amount of input tax that you will claim and;
  • If more than one supply is on an invoice you can record the totals from the invoice.

Once MTD comes into effect businesses will be required to:

  • Maintain their records digitally, through third party software;
  • Report summary information to HMRC quarterly through their ‘digital tax accounts’ and;
  • Make an end of year declaration through their digital tax accounts.

The minimum data you will be required to keep digitally will include invoice date, invoice value, income or expense category and deducted amount / percentage for expenses. As mentioned above, all VAT registrations will be required to keep additional data.

Providing data to HMRC
Once all the relevant data for a quarter has been collated, registrations will need to be able to feed this data directly into the HMRC system.  The information that will be sent to HMRC will be a summary of data for each quarter.   When the quarterly update is due, you will have one month to compile your records and complete the update. It is envisaged that the analysis of the submitted data will be similar to the existing categories in the self-assessment tax return.

It should be noted that where a VAT registered person has any other income (e.g. from alternative sources such as property rental income) this will also need to be recorded and reported.

Providing data to HMRC

Once all the relevant data for a quarter has been collated, registrations will need to be able to feed this data directly into the HMRC system.  The information that will be sent to HMRC will be a summary of data for each quarter.   When the quarterly update is due, you will have one month to compile your records and complete the update. It is envisaged that the analysis of the submitted data will be similar to the existing categories in the self-assessment tax return.

It should be noted that where a VAT registered person has any other income (e.g. from alternative sources such as property rental income) this will also need to be recorded and reported.

Finding the right software

HMRC has recognised that there are concerns about the costs associated with the change. We understand they will ultimately require software companies to produce basic software that is generally MTD compliant at no cost, so any upgrades required to make an existing accounting package compliant should be free. However, at present there is no official requirement for free software, which is 'MTD for VAT' compliant. While a free solution can be enticing, it is important to use software appropriate to every requirement. For example, a partnership will need software that can record the partners’ details and profit shares. Those with partial exemption or non-business calculations will also need to consider how their calculations will be submitted to HMRC. Be sure to think through what you need before you commit to a particular solution.

This is a significant change in how tax is reported and in how finance teams operate. The Government has said it will not widen the scope of MTD beyond VAT until April 2020 at the earliest. This will allow businesses to come to terms with this new era of accounting.

How can we help?

We have teams of VAT and Xero specialists who can explain the changes and help you to understand what this means for you.

If you want to discuss your VAT accounting procedures, please contact Afshana Mohammed or Scott Berry.

If you are interested in discussing converting your accounting records to Xero, which will have the functionality to cater for your MTD obligations from 1 April 2019, please contact Lucy Wright.

Bookmark and Share