The government has confirmed plans to publish and consult on draft VAT regulations for Making Tax Digital (MTD), with the aim to have the regulations in place by April 2018 to give businesses and software developers at least twelve months to prepare.
In July 2017 the Government announced that MTD is being delayed. MTD will be not be mandatory until April 2019, and then only for VAT. From that date, businesses with a turnover above the VAT threshold (currently £85,000) will be required to keep digital records for VAT purposes.
The VAT regulations will specify the information a business needs to maintain in digital format and will include:
- The business name, principle place of business and VAT registration number, along with information about VAT accounting schemes used;
- the VAT account that each VAT registered business must keep, by law – this is the link between primary records and the VAT return; and
- information about supplies made and received.
Those reporting under the VAT flat rate scheme will not have to report under MTD except for purchases relating to capital goods with a VAT inclusive value of £2,000 or more.
Impact on businesses
Quarterly reporting for VAT is already mandatory for most businesses. Although 99% of VAT returns are filed online, only around 12% are currently filed via software. The majority of returns are therefore (presumably) manually entered onto the government gateway page and submitted to HMRC – requiring manual input and intervention. Under MTD, businesses will not be able to keep manual records.
Currently, spreadsheets are commonly used – not only to maintain records, but also to convert the information from accounting software into the VAT return figures. MTD requires spreadsheets to interact directly with software. Overcoming these issues may be challenging for businesses.
MTD applies for VAT return periods commencing on or after 1 April 2019. This is the same time that the UK will leave the EU. VAT is likely to be significantly impacted by Brexit, particularly in relation to the VAT treatment of transactions between the UK and EU.
By April 2019, businesses will need to:
- understand the tax-technical changes to the UK/EU VAT rules; and
- ensure that their accounting systems and processes can deal with such changes correctly.
These changes will need to be implemented via the new reporting requirements of MTD. Businesses and their advisers are in for a busy time in 2019 – Early planning and preparation will be the key to a successful transition.