United Kingdom: Making tax digital – VAT

What is it?

Making tax digital is the UK Government’s attempt to ensure that all VAT records and submissions are electronic. It will initially apply for VAT returns with effect from April 1, 2019 for businesses trading in the UK above the UK VAT registration threshold (currently GBP 85,000). From this date, businesses must use “functional compatible software” which is software, or a collection of different pieces of software that allows or provides:

• The retention of records digitally (i.e., transactional data);
• A link through a platform to electronically provide the UK tax authority (HMRC) with information and VAT returns; and
• A link through a platform to receive information from the HMRC.

HMRC’s intention for the above is twofold, firstly to ensure most UK VAT registered businesses have a software package in which their VAT records/transactional data are kept (businesses will no longer be able to keep manual ledgers). Secondly, to ensure that the information flows to the VAT return schedule electronically (i.e., without manual input) and transposition errors are avoided when the VAT return is submitted.

What is functional compatible software?

Functional compatible software is either a software package which both records transactions and links to the UK tax authorities systems for the submission and receipt of information, or a collection of software that achieves the same purpose.

There are a number of financial software/ERP providers that are developing add-ons to enable their packages to be fully regarded as functional compatible software. However, it is accepted that software such as spreadsheets can form part of the functional compatible software and “bridging software” or “API enabled spreadsheets” can be used to link to HMRC’s system to allow for the electronic submission of VAT returns. Where a spreadsheet is used, there must be digital links from the software containing the transactional data to the spreadsheet. In practice, this means exporting data directly from the financial software to the spreadsheet rather than manually entering values. However, the digital link requirement does not fully come into force until March 31, 2020, although the VAT return must still be submitted electronically.

HMRC is currently undertaking a pilot program to test the software being developed to provide the link to the HMRC’s systems for the submission of the VAT returns.

What does this mean in practice?

Most businesses will already have in place an accounting package in which the digital records are maintained. Therefore, most if not all of the relevant data (i.e., the tax point for sales and purchases, value of supply, output VAT, input VAT and for sales, the rate of VAT) will already be retained electronically. While it is possible that some businesses will have one piece of software that is fully making tax digital compliant, for many businesses bridging software will be needed to submit the VAT returns. Where an agent is used to prepare and submit VAT returns, the agent will also need to purchase making tax digital compliant software or bridging software for the submission of the VAT returns.

What other information needs to be submitted?

Supplementary data can be submitted, however, the only mandatory information that needs to be submitted is the information contained in the nine boxes of the current UK VAT return. Businesses will not be required to submit any transactional data along with their VAT return.