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Developments on Making Tax Digital for VAT

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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

By:
Brian Palmer
DMS Posts

Software suppliers supporting Making Tax Digital for VAT

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More than 130 software suppliers have told HMRC that they’re interested in providing software for Making Tax Digital for VAT. Over 35 of these have said they’ll have software ready during the first phase of the pilot in which HMRC is testing the service with small numbers of invited businesses and agents. The pilot will be opened up to allow more businesses and agents to join later this year.

Software suppliers

The following software suppliers have both:

  • tested their products in HMRC’s test environment
  • already demonstrated a prototype of their software to HMRC

HMRC will update this list as testing progresses. Check with your existing software supplier to see if they will be supplying suitable software for the pilot or contact one listed below:

 

HMRC – Software suppliers supporting MTD for VAT

 

DMS Posts

Entrepreneurs’ Relief

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Entrepreneurs’ relief explained (ER)

There are many entrepreneurs who wish to sell or give away their business due to several reasons. Some simply do not have time to manage their well-established business while others are not satisfied with their company or business. Irrespective of what the reason may be, entrepreneurs may gain benefits by selling or giving away their business at a reduced tax rate. This benefit is called entrepreneurs’ relief.

Entrepreneurs may sell or give away their business and claim entrepreneurs’ relief. Entrepreneurs’ relief is available for up to £10,000,000 lifetime gains. This certain amount of money is called entrepreneurs’ relief for a reason. Entrepreneurs gain tax relief at a reduced rate of 10%.

ER is available to:

Entrepreneurs’ relief is available to sole traders or partners selling or giving away whole or a certain part of their business. It is also available to company directors and employees having 5% or more shareholding.

Formulation of Entrepreneurs’ Relief

The need of entrepreneurs’ relief was felt long before when many entrepreneurs started to feel the need to sell their business or give away their business. There are many entrepreneurs who wish to sell whole or a part of their company and gain maximum benefit from it.

Increase in Entrepreneurs’ Relief since 2008

Entrepreneurs’ relief reduced the amount of Capital Gains Tax paid on business assets on or after April 2008. So the entrepreneurs’ relief began in the year 2008. Today, in the United Kingdom entrepreneurs selling or giving away their business can obtain entrepreneurs’ relief which is an allowance of £10,000,000. However, this is the modern day amount. During and after the year 2008 there have been several changes in the amount.

  • In March 2010, the entrepreneurs’ relief was up to £2 million.
  • Three months later, it was raised to £5 million.
  • In March 2011, the budget was then raised to £10 million.

Conditions and requirements for Entrepreneurs’ Relief

Entrepreneur’s relief may be considered as one of the most attractive tax benefits any entrepreneur may obtain. By taking appropriate steps, entrepreneurs may gain maximum benefit from entrepreneurs’ relief. There are some measures that need to be taken care of to gain maximum benefit from entrepreneurs’ relief. If the requirements for availing entrepreneurs’ relief are fulfilled appropriately, then any entrepreneur selling or giving away their business may gain a lot of benefits and the entrepreneurs’ relief may prove to be quite useful.

  • The first and the most important thing to keep in mind is that all the conditions for entrepreneur’s relief must be met for at least 12 months. This means that any entrepreneur claiming entrepreneurs’’ relief must keep the business appropriate for the relief at all times.
  • Today, the limit of entrepreneurs’ relief is £10 million per person. It is a considerable sum and any entrepreneur selling or giving away their business can be entitled to have this money.
  • Any start-up business that is unhappy or unsatisfied with the outcome can gain benefit from the entrepreneurs’ relief. By earning this amount of money, any entrepreneur may gain insight and acquire resources to start from scratch.

Since 2008, when entrepreneurs’ relief was first introduced several entrepreneurs have gained benefit from entrepreneurs’ relief.

Recent changes in Entrepreneurs’ Relief

In the past couple of years, laws and policies concerning entrepreneurs’ relief have been significantly modified, as a consequence of the UK Government’s initiative and attempts to rectify the loopholes in the system. These changes are mainly related to capital gains tax.

One of the major concerns that the UK Government has been trying to resolve is the establishment of a workable policy and machinery to provide greater tax relief on an individual’s business assets than that on his personal or investment assets. The introduction of the policy that led to the reduction and elimination of tax payments in direct proportion to the period for which the assets are being held is one of the government’s attempts to extend increased support towards entrepreneurs’ relief.

Capital gains tax

In addition to the previously stated initiative, the government also introduced a policy of reduced capital gains tax rate on all gains. Under this policy, the capital gains tax, as an attempt to facilitate entrepreneurs’ relief, was decreased to a rate of 18%, on all gains acquired through the sale of a business entity.

However, capital gains tax, as an integral part of entrepreneurs’ relief policy, by the government has been subjected to further alteration. The government has applied changes to the payment of capital gains tax, mainly on the basis of higher rate threshold defined for capital gains and standard rate band. Entrepreneurs whose capital gains exceeded the higher rate thresholds were required to pay a capital gains tax at a rate of 28%, while those whose capital gains were within the stated limits of standard rate band were liable to make a capital gains tax payment at a rate of 18%.

These initiative, concerning the reduction and tapering of capital gains tax are primarily focused on encouraging entrepreneurial initiative and ensuring the prospective entrepreneurs do not feel reluctant to lay down the foundation of a new business setup, as a result of their concerns surrounding the payment of a considerable amount on account of capital gains tax, if ever in the future a business needs to be sold. It is believed that through facilitating entrepreneurs, entrepreneurial culture is to be given a boost which will eventually contribute towards the creation of more job opportunities and acceleration of economic growth.

As the significance of entrepreneurs’ relief for supporting economic growth has been widely acknowledged, the government has taken the initiative to provide further support to entrepreneurs under this policy. The rate of capital gains tax has been reduced to 10%, for lifetime capital gains that are within the limit of £5 million. This modification in the policy has particularly benefitted established entrepreneurs, who now wish to explore new pastures or are thinking about retiring.

Challenges faced while availing Entrepreneurs’ Relief

The recent changes concerning entrepreneurs’ relief though have largely benefitted the majority, but there are some sections which may suffer as a consequence of newly introduced changes.

Sale of loan notes

The first major impact of these changes concerns the eventual CGT position of loan note holders. Those entrepreneurs, who might have exchanged their shares that qualified for entrepreneurs’ relief, for business loans, are advised to re-examine their CGT positions at the eventual sale of their loan notes. There are chances that if the loan note holders proceed to sell these possessions, they may be liable to pay CGT at an increased rate, rather than the expected rate of 10%.

Qualification criteria

Also, with the recent development concerning the entrepreneurs’ relief policy and its increasing popularity, it is expected that HMRC might introduce some modifications in the policy. It is believed that these changed are mainly to be concerned with the qualification criteria for entrepreneurs’ relief. Hence, under the changing circumstances, entrepreneurs need to be wary and aware of their statuses for qualifying for entrepreneurs ‘relief.

Impact on shareholders

Since entrepreneurs’ relief policy has also been subjected to changes concerning the qualification of shareholders, shareholders may find themselves surrounded in ambiguity, with respect to their qualification for availing the facilities offered through entrepreneurs’ relief. To be sure of their current position, shareholders today need to study and understand all the recent changes incorporated into the entrepreneurs’ relief policy.

Partnerships

Perhaps, the impacts of the recent changes in the entrepreneurs’ relief policy are to be most deeply felt by sole traders and those entrepreneurs who are working in partnerships. The recent changes are to render significant negative impacts on the sale of shared business assets, which may be proposed to be sold separately.

Structural shortcomings

Furthermore, questions are being raised ion the structural development of entrepreneurs’ relief policy by various experts. Many have pointed towards the need to modify the structure of the policy to ensure that the extension of entrepreneurs’ relief support is extended to individuals who have owned considerable shares in business but fail to qualify for entrepreneurs’ relief due to unfulfilled technical requirements. The major issue in this area is associated with the requirement for entrepreneurs to own business assets for a prescribed period of time in order to qualify to be facilitated through entrepreneurs’ relief.

DMS Posts

Record-keeping requirements under GDPR

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GDPR is now in full effect and it contains explicit rules about how you process and secure data. Diana Bruce of the CIPP explains the ins-and-outs.

On 23 May 2018 the General Data Protection Regulation (GDPR) was effectively integrated into the new Data Protection Act (DPA) 2018. There were significant changes within GDPR which moved the emphasis away from the “best practice” approach of DPA 1988 to a “requirements” approach under GDPR. The documentation of processing activities is a new requirement under GDPR.

GDPR contains explicit provisions about documenting your processing activities. You must maintain records on several things such as processing purposes, data sharing and retention. You may be required to make the records available on request to the Information Commissioner’s Office (ICO) or other appropriate authority for the purposes of an investigation.

The record-keeping obligation applies to both controllers and processors employing 250 people or more. Processing activities of internal records must be maintained and the following information as a minimum must be recorded:

  • Name and details of the organisation (and where applicable, of other controllers and the data protection officer)

  • Purpose(s) of the processing

  • Description of the categories of individuals

  • Description of the categories of personal data

  • Categories of recipients of personal data

  • Details of transfers to third countries or international organisations including documentation of the transfer mechanism safeguards in place

  • Retention schedules

  • Description of technical and organisational security measures

There is a limited exemption for small and medium-sized organisations so if you have fewer than 250 employees, you only need to document processing activities that:

  • Are not occasional

  • Could result in a risk to the rights and freedoms of individuals

  • Involve the processing of special categories of data or criminal conviction and offence data

Even if you are not obliged to keep records, doing so can only increase the effectiveness of your GDPR compliance processes.

All organisations have to provide comprehensive, clear and transparent data privacy policies.

As part of your record of processing activities, it can be useful to document (or link to documentation of) other aspects of your compliance with GDPR and the UK’s Data Protection Bill. Such documentation may include information required for privacy notices, such as:

  • The lawful basis for the processing

  • The legitimate interests for the processing

  • Individuals’ rights

  • The existence of automated decision-making, including profiling

  • The source of the personal data

  • Records of consent

  • Controller-processor contracts

  • The location of personal data

  • Data Protection Impact Assessment reports

  • Records of personal data breaches

  • Information required for processing special category data or criminal conviction and offence data under the Data Protection Bill, covering: the condition for processing in the Data Protection Bill, the lawful basis for the processing in GDPR and your retention and erasure policy document.

Doing an information audit or data-mapping exercise can help you find out what personal data your organisation holds and where it is. You can find out why personal data is used, who it is shared with and how long it is kept by distributing questionnaires to relevant areas of your organisation, meeting directly with key business functions, and reviewing policies, procedures, contracts and agreements.

Records of your processing activities must be kept in writing and this can include an electronic format – the information must be documented in a granular and meaningful way. It may well depend on the size of your business and the volume of processing activities as to whether a spreadsheet format would suffice or whether you need to consider a bespoke package to be tailored to your specific business needs.

The ICO has developed some basic templates to help you document your processing activities.

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DMS Posts

HMRC Update – Making Tax Digital (MTD)

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What is MTD?
MTD is a key part of the government’s plans to make it easier for businesses to get
their tax right and keep on top of their tax affairs. HMRC’s ambition is to be one of
the most digitally-advanced tax administrations in the world, modernising the tax
system to make it more effective, more efficient and easier for customers to comply.
Keeping digital records and providing updates to HMRC directly through
MTD-compatible software will help reduce errors, cost, uncertainty and worry.
This streamlined digital experience will integrate tax into day-to-day business
record-keeping, so that businesses can view their tax position in-year and be confident
that they have got their taxes right.

When is this due to happen?

You can sign up a client to MTD for Income Tax now, although the service will
remain voluntary until 2020 at the earliest.

From April 2019, MTD for VAT will be mandatory for businesses whose turnover
is above the VAT registration threshold (currently £85,000). This means that those
businesses will have to keep records digitally and use MTD-compatible software
to submit their VAT Returns to HMRC.
It will remain voluntary for VAT-registered businesses below the VAT threshold
until 2020, at the earliest.