Making Tax Digital for VAT

What is it?

As has been detailed in an earlier newsletter, Making Tax Digital for VAT (MTD) is the UK’s attempt to ensure that all VAT records and submissions are electronic. However, unlike in some EU Member States, MTD is not a requirement to provide transactional data directly to the UK authorities. The actual data submitted (the 9 boxes) is the same as it has been for many years.

What is changing, however, is the requirement to keep transactional data digitally, for there to be a “digital journey” for all data, meaning that relevant software must link digitally and for VAT return data to be submitted directly to HMRC electronically.

The various pieces of software used by the business form the “functional compatible software” and, crucially, spreadsheets are allowed to be part of the functional compatible software. This allows businesses to continue to use spreadsheets to help assist with the preparation of VAT returns should they choose to do so.

The reason for the digital links is to prevent manual adjustments to the data on separate spreadsheets so there is a clear digital audit trail from the source data to the VAT return. However, it is accepted that certain processes, such as partial exemption calculations, can be undertaken separately from the linked digital records.

When does it start?

Most UK businesses trading above the VAT registration threshold (currently GBP 85,000) have been required to maintain digital records and submit VAT returns digitally for VAT periods commencing April 1, 2019. However, for most non-UK companies (other than those with establishments in the UK) and certain other UK traders, implementation for VAT periods commencing after October 1, 2019 has been deferred. This means for non-UK traders on quarterly VAT return periods, the first submissions of VAT returns under MTD will be during or after January 2020.

The digital links requirement for MTD has a “soft-landing” period to April 1, 2020 or October 1, 2020 for deferred businesses, which means that additional time has been allowed for businesses to adapt to this.

What should businesses be doing?

Businesses will need to submit VAT returns either directly from their accounting systems or, if spreadsheets are used, purchase “bridging software” that links the spreadsheet to HMRC’s systems. Therefore, businesses should be contacting their accounting software providers to ask whether they have developed a VAT-return submission module or, alternatively, contacting the suppliers of the bridging solution (there are many software companies that have developed bridging tools). If an agent is used to prepare and submit the VAT returns, businesses should be asking them whether they are ready for MTD submissions.

In respect of the digital link requirement, this will depend on the types of software used by businesses for recording income and expenditure. Where everything is held on one accounting system, the business should be ensuring:

• The relevant VAT data are recorded; and
• Where a bridging solution is to be used, that data can be exported to a spreadsheet

Where there are multiple pieces of software (e.g., accounting package, invoice scanning software, and expenses software), they will need to be reviewed to ensure they do link digitally. It is likely that where multiple systems are used, IT amendments will be required to ensure the digital journey is complete.