Making tax digital plans for VAT

Published: Tuesday 19 June 2018

As of April 2019, all VAT registered businesses with a taxable turnover above the VAT registration threshold will be required to maintain digital records as part of HMRC’s push towards Making Tax Digital (MTD). This applies to all taxpayers irrespective of their trading style or status, and so will affect the vast majority of the VAT landscape, bar a few exemptions, and will encompass all existing VAT simplification schemes. 

The primary aim of MTD is to make tax administration more effective, efficient, and easier for taxpayers through the use of a fully digitised tax system, whilst reducing HMRC’s costs in overseeing the tax system. For some this will represent a major shift in how VAT is handled, requiring a move from paper records to digital files, whilst for others it will merely mean ensuring their existing arrangements are MTD compliant. 

MTD is the next logical step in HMRC’s evolution of the UK’s VAT reporting system. As of 2012, all VATregistered traders have had to file their periodic returns electronically through HMRC’s VAT portal, using a dedicated account. MTD extends this provision so that the reporting itself is electronic, the return information being supplied to HMRC by MTD-compatible software. 

Currently HMRC is working with major software providers to ensure their existing products or new product lines will work with MTD ahead of the go live date. HMRC is also confident that free software will be in the marketplace by the time MTD goes live, and so there should not be a monetary cost to smaller businesses. There is an inherent risk to businesses that use bespoke software that they will not have the product redesigned in time for the change, and care will need to be taken that such products are included in the move across to the new regime. 

Where a taxpayer uses spreadsheets to record data, these will be permitted under MTD as being a digital record. However, they must be part of a seamless digital flow of data from the business to HMRC; there can be no manual entry of spreadsheet data to HMRC’s systems. The flow of data from one program to another must be undertaken using Application Program Interfaces (APIs), and any digital system that does not do so will not be considered to be permitted under MTD. 

The following categories will be exempted from undertaking MTD as a compulsory matter, but may do so on a voluntary basis: 
  • VAT registered businesses whose taxable turnover is below the VAT registration threshold, i.e. those businesses who are voluntarily registered; 
  • Taxpayers who are ‘digitally excluded’, defined as those who cannot engage with accounting software on the basis of 
  • religion; 
  • disability;
  • age; or 
  • remoteness of location. 

Anyone who believes they are digitally excluded for a specific reason, and can demonstrate such a case to HMRC, will also be considered for exemption on a case-by-case basis. The next step for all VAT registered businesses is to consider how their reporting process may need to change to meet the post April 2019 legislation. Whilst HMRC have confirmed a ‘soft landing’ in terms of MTD reporting, the requirement to be compliant is coming.