The introduction of Making Tax Digital for VAT will transform the way VAT is reported with a requirement to use digital records, but there is some respite as the first filing date is no earlier than 1 July and there is a soft-landing penalty regime in year one.
In a little under three weeks many businesses that file VAT returns will have no choice but to file those returns digitally. This will be through dedicated accounting software rather than the present method, which requires the online filing of returns but which can involve the manual input of return values. The move is part of the government’s Making Tax Digital programme, and it is clear from our conversations with businesses show that many are far from ready.
From April this year, the 2.55m VAT registered businesses with a turnover exceeding the £85,000 VAT threshold will be required to file VAT returns through Making Tax Digital compliant software and not via the current HMRC portal.
The move will require businesses or their agents to use Making Tax Digital compliant software, such as QuickBooks, Xero, Iris, Twinfield or Sage, or to use ‘bridging’ software which allows a digital transmission to HMRC.
From April 2020, businesses will not only have to file returns digitally but also ensure that their internal and intra-VAT group systems and spreadsheets are digitally linked. There may well be an additional cost and process review involved in achieving this.
The timing of Making Tax Digital is far from perfect with businesses contending with the implications of Brexit on 29 March.
Brexit has clearly been the focus and as such some businesses may have been burying their heads in the sand, thinking that Making Tax Digital may not happen. Much debate recently as to whether it should be delayed has only fuelled the thought for some that they should further stall their preparations.
To be clear though, although the government has stated that it will keep VAT procedures as close to the current position as possible if we leave the EU on 29 March this year without a deal, it has made no indication that Making Tax Digital will be delayed… deal or no deal!
The only concession HMRC has given is a six-month deferral to some businesses including:
- VAT groups;
- VAT divisions;
- unincorporated charities;
- public sector entities required to provide additional information on their VAT return (government departments, NHS Trusts);
- local authorities;
- public corporations;
- traders based overseas;
- those required to make payments on account; and
- annual accounting scheme users.
HMRC has undertaken a detailed exercise to identify these businesses and is in the process of writing to those affected.
While HMRC has reaffirmed that Making Tax Digital for VAT is being prioritised and is continuing as planned, it has also stated that due to resource issues around delivering on EU exit responsibilities it will be slowing down the implementation of further Making Tax Digital requirements, relating to income tax and corporation tax.
HMRC began a pilot for Making Tax Digital for VAT last October, initially for businesses that have more straightforward VAT requirements.
This started with sole traders and companies and has now opened up more recently to partnerships, VAT Flat Rate Scheme users, VAT groups and divisions and businesses that trade with the EU.
There are, however, a small number of businesses that are still excluded from the trial, such as trusts and local authorities. But the pilot is open to any businesses which want to participate.
Awareness and communications
It is clear that the government’s promotion and communication to support this programme is not working as well as we would have hoped. Too many businesses are just not prepared for this change.
To illustrate this, research of 530 businesses conducted by Kreston Reeves in the second half of 2018 suggested that just 65% fully understand and are prepared for the change, with just over half (53%) surveyed using Making Tax Digital compliant software. A worrying 29% of businesses did not think their finance teams were ready for the deadline, and 19% did not recall having heard of Making Tax Digital at all, clearly leaving themselves at risk of penalties.
The good news is that most accountancy firms are up to speed with the VAT programme and are already using fully compliant software.
Making Tax Digital for VAT overseas
The OECD is setting the agenda on Making Tax Digital and is part of a push for greater transparency in the tax system through improvements in the efficiency of tax collection and detecting tax evasion. It published guidance on SAF-T (Standard Audit File for Tax) which is principally an international standard for the digital exchange of accounting data from businesses to tax authorities, typically in XML format. This has set the parameters for Making Tax Digital.
Digitalisation of tax authorities is already fully operational in Spain, Portugal, Hungry and Poland, with many other countries set to follow suit.
Spain has seen particular success with this transition since its introduction in 2017 with near live reporting. Businesses have four days to electronically submit data from invoices to tax authorities through automated extraction from the accounting system.
Poland has also introduced mandatory SAF-T filing together with Making Tax Digital for VAT which, after the initial introduction for larger businesses in 2016, was extended to cover all VAT registered businesses from January 2018. This means that they file:
- general ledger information and journals;
- accounts payable;
- accounts receivable;
- inventories; and
- fixed assets.
Using big data analytics, they have raised enquiries on over 85,000 transactions across 36,000 entities raising £30m of tax. It has worked so well in Poland that VAT returns will soon cease to exist.
This certainly gives an idea of where the UK is heading. Making Tax Digital for VAT is the starting point and other taxes will surely follow suit.
The message for businesses now has to be that Making Tax Digital, whether for VAT or other taxes, is not going away. Unless they are certain that all their internal systems and spreadsheets are already fully Making Tax Digital compliant, they should get help now in reviewing their systems. Even with HMRC’s recent announcement that digital reporting as such will not be mandatory for year one and with the proviso that cut and paste will be acceptable, this is only a short-term solution. There is not long to go even if you are working to the first filing date of 1 July.