Developments on Making Tax Digital for VAT

Where are we now?

KEY POINTS

  • Businesses will not be mandated to use Making Tax Digital until April 2019 and then only for those above the VAT threshold.
  • In April 2018, simple VAT-registered entities were invited to join the pilot programme.
  • Interested parties have time to pause and aim for a more achievable implementation date.
  • HMRC has published a VAT guide, stakeholders’ communication pack and list of software suppliers.
  • Bridging software that will enable data to be taken from spreadsheets and converted into an MTD-friendly format is becoming available.
  • The government will not widen MTD before April 2020 at the earliest.

What? A minister who listens? It’s a little over a year ago since the then recently-appointed Financial Secretary to the Treasury, Mel Stride, published a written statement (tinyurl.com/HMT-7423) responding to disquiet about the proposals for Making Tax Digital (MTD). This said: ‘Having listened carefully to the concerns raised by the Treasury Select Committee, parliamentarians and stakeholders, the government is announcing policy changes that will be reflected in the legislation to be introduced.’

He continued: ‘Businesses will not be mandated to use the Making Tax Digital system until April 2019 and then only to meet VAT obligations. This will apply to businesses with a turnover above the VAT threshold. Businesses with turnover below the VAT threshold will not be required to use the system but can choose to do so. Businesses will also be able opt in for other taxes, benefiting from a streamlined, digital experience.’

Mr Stride’s action was a commonsense move born out of a series of delays that had beset the rollout of MTD. These dated from when George Osborne announced ‘the death of the tax return’ in his March 2015 Budget speech although, I hasten to add, they were not of HMRC’s making.

 

Impact of the announcement

The effect of this about-face was equivalent to a release of pressure from a safety value. All parties could pause, regroup and aim for the more achievable April 2019 target with a much-reduced administrative burden.

Although income tax mandation for the self-employed and unincorporated landlords (hereafter both referred to as the self-employed) might be off the table in the short term, HMRC promised to continue working with software developers along its original delivery roadmap. The aim was to ensure that MTD-compliant products from third parties would be available for those wishing to join the new income tax pilot.

 

What happened next?

In response, almost all software companies redeployed their internal development resources away from attempting to meet the demands of HMRC’s MTD income tax quarterly filing requirement to ensuring delivery of the more straightforward VAT-MTD compliant products well ahead of April 2019 VAT mandation.

At the end of October 2017, HMRC released the application programming interfaces (APIs) required to transmit to HMRC all the data contained in nine boxes of information and the associated declaration that make up a traditional VAT return.

An API is, in effect, the virtual plumbing (programming) required to connect third-party software to HMRC’s platform so that data can be transmitted to and received from it. This is in much the same way as banking apps on a smartphone can send and retrieve data from a bank’s back-end system.

In November, HMRC began to accept the transmission of technical data (test data) from developers as a way of testing that the VAT APIs embedded into their software worked.

Then, in early April 2018 and without a fanfare, HMRC invited VAT-registered entities with the simplest of affairs to sign up to join its MTD-VAT pilot. On 26 April, it released the APIs that developers required to enable their software to transmit live data straight to HMRC’s enterprise tax management platform (ETMP).

Soon afterwards, HMRC received the first MTD-compliant VAT submission.

As MTD is rolled out and more heads of duty are moved on to HMRC’s EMTP, taxpayers will be able see their complete financial picture through their digital account, just as they do in online banking. In the longer term, HMRC’s publication Making Tax Digital for Business: VAT Guide for Vendors states: ‘They will be able to set an over-payment of one tax against the under-payment of another. It will feel like paying a single tax.’ (See here)

 

Private testing

Although it may be accepting live data, VAT-MTD is in a controlled period of testing – known as a private beta testing phase. Only applicants with simple VAT affairs that meet HMRC’s initial tight admission criteria are accepted into this live pilot.

It is likely that the MTD-VAT pilot has significantly fewer than 500 VAT-registered entities taking part now. However, assuming all goes well HMRC will gradually relax its selection criteria, thus permitting a greater range of entities to join.

 

Latest developments

On 13 July, HMRC published:

  • an MTD VAT guide (VAT Notice 700/22: Making Tax Digital for VAT);
  • an HMRC communication pack for stakeholders; and
  • a list of software suppliers supporting Making Tax Digital.

All can be found on the MTD for VAT collection page.

With about eight months to VAT mandation, pressure from commentators to compel HMRC to publish its MTD VAT guide had been ramping up. Not least because guidance was required to clarify what constituted digital record-keeping, what was meant by functionally compatible software and what digital links looked like.

At point 3.2.1.1, the guide covers the post-April 2019 one-year penalty soft landing for those mandated to join next year but who will be unable to establish digital links between one piece of accounting software and another in time.

Many stakeholders, such as trade bodies and software suppliers, had been pressing HMRC to publish the communications pack to provide information and source material so that they in turn could inform their stakeholders.

The publication of the software supplier list allows those advising on or faced with complying with the April 2019 VAT mandation to gain a level of reassurance that large third-party software solution providers such as Intuit have market-ready, VAT-MTD compliant software.

 

Bridging software

From an MTD perspective, bridging software is a third-party, API-enabled software product capable of drawing data digitally from a spreadsheet, turning it into a format compatible with MTD for VAT and then validating it before submitting the information to HMRC at the touch of a button.

Until recently, this long-promised piece of software had been assuming the mythical status accorded to the likes of the Loch Ness Monster – in other words, everyone has heard of it, everyone has a view of what it would look like but … no one had actually seen it.

All that is changing. BTC Software and PwC have recently announced they have market-ready bridging products. What’s more, PwC plans to make its product free to charities that might otherwise struggle to meet the cost of complying with HMRC’s VAT-MTD requirements.

 

Expect others to follow…

The great thing about bridging software is that it promises an affordable way for VAT-registered entities, such as spreadsheet users, to comply with HMRC’s MTD digital end-to-end requirement. It also affords businesses of significant size, often with disparate systems that do not speak to one another or groups with non-integrated accounting, the same opportunity.

What bridging software does not do is provide the level of added-value functionality, such as near limitless management reports, built in as standard to third-party, cloud-based accounting packages.

 

So where are we now?

There are just over 20 developers with VAT-MTD-ready products. Further, HMRC has stated that more than 150 software suppliers have registered an interest in providing software for VAT-MTD. Of those, more than 40 have said they will have software ready during the private beta phase of the VAT-MTD pilot. (See here.)

All this, combined with the filing of MTD-compliant VAT returns during the private beta period puts the department in a much better place to deliver VAT-MTD than it was immediately before Mr Stride’s announcement. That said, I see the position as finely balanced. We are less than eight months away from mandation and it does not look like VAT-MTD will emerge from its private beta phase anytime soon.

At the end of June, the British Chamber of Commerce called for a postponement to ‘allow the Revenue to focus its immediate attention on supporting businesses through the Brexit process, which must be a key priority’. Others, like myself, remain more optimistic.

However, a limited number and type of VAT-registered entities are engaged in private beta testing and there is no clear indication of when the public beta phase will start. Consequently, there will come a point soon – and certainly before the end of the summer (before the middle of October in Civil Service speak) – when HMRC will need to give serious consideration to extending the pilot testing phase by deferring the mandation start date.

 

A glance into the future

Further into his July 17 written statement Mr Stride wrote: ‘The government will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record-keeping to become more widespread.’

Given the limited scope of the VAT-pilot and that VAT mandation is just over eight months away, I believe there is insufficient time, using the minister’s own words, ‘to test the system fully and for digital record-keeping to become widespread’ to garner the evidence required to support an earlier extension to mandation.

As well as this, and for the reasons stated earlier, there is not the income tax MTD-compliant third-party software products available (HMRC has a list of four). This situation looks unlikely to change until VAT-MTD is successfully delivered and the software industry is reassured that ministers have an appetite for mandation. Experience suggests that, once an announcement about mandation is made, it will change quickly as developers move quickly to capitalise on the opportunity.

Despite being a passionate believer in what MTD has to offer, and that the future of the accountancy profession is in the cloud, I cannot see further mandation returning to the table before 2021 at the very earliest. In the meantime, ministers and HMRC must contend with that other small cloud on the political horizon … the travails of Brexit.

Developments on MTD for VAT