DMS Posts, Tax

Autumn Budget 2018 – Employment Taxes

Off-payroll working in the private sector

The changes to IR35 that came into effect in April 2017 for the public sector will be extended to the private sector from April 2020. Responsibility for operating the off-payroll rules will be transferred from the individual to the organisation, agency or third party engaging the worker. Only medium and large organisations will be subject to this change.

Employment Allowance

The Employment Allowance provides businesses and charities with up to £3,000 off their employer NICs bill. From April 2020, the Employment Allowance will be restricted to those employers whose employers’ NICs bill was below £100,000 in the previous tax year.

Employer provided cars

The scale of charges for working out the taxable benefit for an employee who has use of an employer provided car are normally announced well in advance. Most cars are taxed by reference to bands of CO2emissions multiplied by the original list price of the vehicle. The maximum charge is capped at 37% of the list price of the car.

For this tax year there was generally a 2% increase in the percentage applied by each band. For 2019/20 the rates will increase by a further 3%.

A new development for the current tax year is an increase in the diesel supplement from 3% to 4%. This applies to all diesel cars (unless the car is registered on or after 1 September 2017 and meets the Euro 6d emissions standard) but the maximum is still 37%. There is no change to the current position that the diesel supplement does not apply to hybrid cars.

Charging facilities for electric and hybrid cars

Legislation is proposed to provide a new exemption from a taxable employment benefit where an employer provides charging facilities for employees’ all-electric and plug-in hybrid vehicles at or near the workplace. The exemption is backdated to have effect from 6 April 2018.

Employer provided cars and vans are already exempt from this benefit.

Exemption for travel expenses

Draft legislation has been issued which removes the requirement for employers to check receipts when making payments to employees for subsistence using benchmark scale rates. This will apply to standard meal allowances paid in respect of qualifying travel and overseas scale rates. Employers will only be asked to ensure that employees are undertaking qualifying travel. This will have effect from April 2019.

The proposed legislation will also allow HMRC to put the existing concessionary accommodation and subsistence overseas scale rates on a statutory basis from 6 April 2019. Like benchmark rates, employers will only be asked to ensure that employees are undertaking qualifying travel.

Self-funded work-related training

The government had previously announced that it would consult on extending the scope of tax relief currently available to employees and the self-employed for work-related training costs. The government has now decided to make no changes to the existing rules. However the National Retraining Scheme is being launched to help those in work, including the self-employed, to develop further skills.

 

DMS Posts, Tax

Autumn Budget 2018 – Business Tax

Making Tax Digital for Business: VAT

HMRC is phasing in its landmark Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system. Regulations have now been issued which set out the requirements for MTD for VAT. Under the new rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.

The new rules have effect from 1 April 2019 where a taxpayer has a ‘prescribed accounting period’ which begins on that date, or otherwise from the first day of a taxpayer’s first prescribed accounting period beginning after 1 April 2019. HMRC has recently announced that the rules will have effect for some VAT-registered businesses with more complex requirements from 1 October 2019. Included in the deferred start date category are VAT divisions, VAT groups and businesses using the annual accounting scheme.

HMRC has recently opened a pilot service for businesses with straightforward affairs and the pilot scheme will be gradually extended for other businesses in the next few months.

Keeping digital records and making quarterly updates will not be mandatory for taxes other than VAT before April 2020.

Keeping digital records will not mean businesses are mandated to use digital invoices and receipts but the actual recording of supplies made and received must be digital. It is likely that third party commercial software will be required. Software will not be available from HMRC. The use of spreadsheets will be allowed, but they will have to be combined with add-on software to meet HMRC’s requirements.

In the long run, HMRC is still looking to a scenario where income tax updates are made quarterly and digitally, and this is really what the VAT provisions anticipate.

Corporation tax rates

Corporation tax rates have already been enacted for periods up to 31 March 2021.

The main rate of corporation tax is currently 19% and will remain at this rate for next year. The rate will fall to 17% for the Financial Year beginning on 1 April 2020.

Class 2 and 4 National Insurance contributions (NICs)

The government has recently announced that Class 2 NICs will not be abolished for the duration of this Parliament. The Chancellor confirmed in March 2017 that there will be no increases to Class 4 NICs rates in this Parliament.

UK property income of non-UK resident companies

Changes are made for non-UK resident companies that carry on a UK property business either directly or indirectly, for example through a partnership or a transparent collective investment vehicle.

Following consultation, from 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to corporation tax, rather than being charged to income tax as at present.

Capital allowances

Annual Investment Allowance

The government has announced an increase in the Annual Investment Allowance for two years to £1 million in relation to qualifying expenditure incurred from 1 January 2019. Complex calculations may apply to accounting periods which straddle this date.

Other changes

A number of changes are made to other rules relating to capital allowances:

  • a reduction in the rate of writing down allowance on the special rate pool of plant and machinery, including long-life assets, thermal insulation, integral features and expenditure on cars with CO2emissions of more than 110g/km, from 8% to 6% from April 2019. Complex calculations may apply to accounting periods which straddle this date
  • clarification as to precisely which costs of altering land for the purposes of installing qualifying plant or machinery qualify for capital allowances, for claims on or after 29 October 2018
  • the end of the 100% first year allowance and first year tax credits for products on the Energy Technology List and Water Technology List from April 2020
  • an extension of the current 100% first year allowance for expenditure incurred on electric charge-point equipment until 2023.

In addition, a new capital allowances regime will be introduced for structures and buildings. It will be known as the Structures and Buildings Allowance and will apply to new non-residential structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 2% on a straight-line basis.

Change to the definition of permanent establishment

A non-resident company is liable to corporation tax only if it has a permanent establishment in the UK. Certain preparatory or auxiliary activities, such as storing the company’s own products, purchasing goods or collecting information for the non-resident company, are classed as not creating a permanent establishment.

From 1 January 2019, the exemption will be denied to these activities if they are part of a ‘fragmented business operation’.

Preventing abuse of the R&D tax relief for SMEs

To help prevent abuse of the Research and Development (R&D) SME tax relief by artificial corporate structures, the amount that a loss-making company can receive in R&D tax credits will be capped at three times its total PAYE and NICs liability from April 2020.

Protecting taxes in insolvency

From April 2020, HMRC will have greater priority to recover taxes paid by employees and customers.

The changes appear to be mainly targeted at the distribution of funds to financial institutions as creditors. The rules will remain unchanged for taxes owed by the business and HMRC will remain below other preferential creditors such as the Redundancy Payment Service.

Other measures

  • Changes to the tax treatment of corporate capital losses from 1 April 2020 to restrict the proportion of annual capital gains that can be relieved by brought-forward capital losses to 50%.
  • Changes to the Diverted Profits Tax from 29 October 2018.
  • An increase in the small trading tax exemption limits for charities from April 2019 from £5,000 per annum or, if the turnover is greater than £5,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £50,000, to £8,000 and £80,000 respectively.
  • The introduction of an income tax charge to amounts received in a low tax jurisdiction in respect of intangible property, to the extent that those amounts are referable to the sale of goods or services in the UK, from 6 April 2019, with targeted anti-avoidance rules for arrangements entered into on or after 29 October 2018.

Digital Services Tax

The government remains committed to reform of the international corporate tax framework for digital businesses. However, pending global reform, interim action is needed to ensure the corporate tax system is sustainable and fair across different types of businesses.

Therefore, the government has announced that it will introduce a Digital Services Tax (DST) which will raise £1.5 billion over four years from April 2020. The DST will apply a 2% tax on the revenues of search engines, social media platforms and online marketplaces where their revenues are linked to the participation of UK users.

Businesses will need to generate revenues of at least £500 million globally to become taxable under the DST. The first £25 million of relevant UK revenues are also not taxable.

Intangible fixed assets

The Intangible Fixed Assets regime, which was introduced from 1 April 2002, fundamentally changed the way the UK corporation tax system treats intangible fixed assets (such as copyrights, patents and goodwill). As the regime is now more than 15 years old, the government would like to examine whether there is scope for reforms that would simplify it and make it more effective in supporting economic growth.

Following a short consultation, the government will seek to introduce targeted relief for the cost of goodwill in the acquisition of businesses with eligible intellectual property from April 2019.

With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.

VAT registration limits

The government had previously announced that the VAT registration and deregistration thresholds would be frozen at £85,000 and £83,000 respectively until April 2020.

The government has now announced that this freeze will continue for a further two years from 1 April 2020.

VAT fraud in labour provision in the construction sector

The government will pursue legislation to shift responsibility for paying VAT along the supply chain with the introduction of a domestic VAT reverse charge for supplies of construction services with effect from 1 October 2019. The long lead-in time reflects the government’s commitment to give businesses adequate time to prepare for the changes.

VAT treatment of vouchers

Draft legislation has been issued to insert a new tax code for the VAT treatment of vouchers, such as gift cards, for which a payment has been made and which will be used to buy something. The legislation separates vouchers with a single purpose (eg a traditional book token) from the more complex gift vouchers and sets out how and when VAT should be accounted for in each case. The new legislation is not concerned with the scope of VAT and whether VAT is due, but with the question of when VAT is due and, in the case of multi-purpose vouchers, the consideration upon which any VAT is payable.

VAT collection – split payment

The government wants to combat online VAT fraud by harnessing new technology and is consulting on VAT split payment. This will utilise payments industry technology to collect VAT on online sales and transfer it directly to HMRC. In the government’s view this would significantly reduce the challenge of enforcing online seller compliance and offer a simplification for business.

 

DMS Posts, Tax

Autumn Budget 2018 – Personal Tax

The personal allowance

The personal allowance is currently £11,850. The personal allowance for 2019/20 will be £12,500.

There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000 and the threshold has remained at this figure since its introduction for the 2010/11 tax year. The reduction is £1 for every £2 of income above £100,000. So for 2018/19 there is no personal allowance where adjusted net income exceeds £123,700. For 2019/20 there will be no personal allowance available where adjusted net income exceeds £125,000.

 

The marriage allowance

The marriage allowance permits certain couples, where neither pays tax at more than the basic rate, to transfer 10% of their personal allowance to their spouse or civil partner.

The marriage allowance reduces the recipient’s tax bill by up to £238 a year in 2018/19. The marriage allowance was first introduced for 2015/16 and there are many couples who are entitled to claim but have not yet done so. It is possible to claim for all years back to 2015/16 where the entitlement conditions are met. A recent change to the law allows backdated claims to be made by personal representatives of a deceased transferor spouse or civil partner.

Tax bands and rates

The basic rate of tax is currently 20%. The band of income taxable at this rate is £34,500 so that the threshold at which the 40% band applies is £46,350 for those who are entitled to the full personal allowance. Additional rate taxpayers pay tax at 45% on their income in excess of £150,000.

The tax on income (other than savings and dividend income) is different for taxpayers who are resident in Scotland to taxpayers resident elsewhere in the UK. The Scottish income tax rates and bands apply to income such as employment income, self-employed trade profits and property income.

In the 2018/19 Scottish Budget, the Finance Secretary for Scotland introduced five income tax rates. The income tax rates range between 19% and 46%. Scottish taxpayers are entitled to the same personal allowance as individuals in the rest of the UK.

Tax bands and rates 2019/20

The government has announced that for 2019/20 the basic rate band will be increased to £37,500 so that the threshold at which the 40% band applies is £50,000 for those who are entitled to the full personal allowance. The additional rate of tax of 45% remains payable on taxable income above £150,000.

From April 2019, the Welsh Government has the right to vary the rates of income tax payable by Welsh taxpayers. The UK government will reduce each of the three rates of income tax paid by Welsh taxpayers by 10 pence. The Welsh Government has provisionally set the Welsh rate of income tax at 10 pence which will be added to the reduced UK rates. This means the rates of income tax paid by Welsh taxpayers will continue to be the same as those paid by English and Northern Irish taxpayers. The Welsh Government will need to confirm this proposal prior to their final Budget.

The Scottish Government will announce the Scottish income tax rates and bands for 2019/20 in the Draft Budget on 12 December 2018.

Tax on dividends

In 2018/19 the first £2,000 of dividends are chargeable to tax at 0% (the Dividend Allowance). The Dividend Allowance will remain at £2,000 for 2019/20. Dividends received above the allowance are taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

In 2017/18 the Dividend Allowance was £5,000. The reduction in the allowance particularly affects family company director-shareholders who extract monies from the company by means of a small salary and the balance in dividends. The cost of the restriction in the allowance for basic rate taxpayers is £225 increasing to £975 for higher rate taxpayers and £1,143 for additional rate taxpayers.

Tax on savings income

Savings income is income such as bank and building society interest.

The Savings Allowance, which was first introduced for the 2016/17 tax year, applies to savings income and the available allowance in a tax year depends on the individual’s marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an allowance of £1,000. For higher rate taxpayers the allowance is £500. No allowance is due to additional rate taxpayers.

Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income less allocated allowances and reliefs) exceeds £5,000.

Rent-a-room relief

Rent-a-room relief gives relief from income tax for up to £7,500 of income to individuals who let furnished accommodation in their only or main residence. Following consultation on the draft legislation and to maintain the simplicity of the system, the government will not include legislation for the shared occupancy test. The government will retain the existing qualifying test of letting in a main or only residence.

Gift Aid – donor benefits

Draft legislation has been issued which simplifies the donor benefits rules that apply to charities who claim Gift Aid tax relief on donations. From 6 April 2019 the benefit threshold for the first £100 of the donation will remain at 25% of that amount. For gifts exceeding £100, charities can offer benefits up to the sum of £25 and 5% of the amount of the donation that exceeds £100. The total value of the benefit that a donor can receive remains at £2,500.

Gift Aid Small Donations Scheme

The Gift Aid Small Donations Scheme (GASDS) applies to small charitable donations where it is impractical to obtain a Gift Aid declaration. GASDS currently applies to donations of £20 or less made by individuals in cash or contactless payment. The limit will be raised to £30 from 6 April 2019.

National Living Wage (NLW) and National Minimum Wage (NMW)

Following the recommendations of the independent Low Pay Commission (LPC), the government will increase the NLW by 4.9% from £7.83 to £8.21 from April 2019.

The government will also accept all of the LPC’s recommendations for the other NMW rates to apply from April 2019, including increasing the rates for:

  • 21 to 24 year olds by 4.3% from £7.38 to £7.70 per hour
  • 18 to 20 year olds by 4.2% from £5.90 to £6.15 per hour
  • 16 to 17 year olds by 3.6% from £4.20 to £4.35 per hour
  • apprentices by 5.4% from £3.70 to £3.90 per hour.

Universal Credit

The government has announced that the amount that households with children and people with disabilities can earn before their Universal Credit award begins to be withdrawn – the Work Allowance – will be increased by £1,000 from April 2019.

In addition the government has listened to representations made by stakeholders on Universal Credit, and has announced a package of extra support for claimants as they make the transition to Universal Credit.

 

 

DMS Posts

Increase in Student Loan Plan 1 and Plan 2 thresholds from 6 April 2019 and Postgraduate Loans (PGL)

The thresholds of Plan 1 and Plan 2 Student Loans are increasing from April 2019.
The current thresholds for the tax year 2018-19 are:
• Plan 1 – £18,330
• Plan 2 – £25,000.
The Department for Education (DfE) has confirmed that from 6 April 2019 the
thresholds will increase to:
• Plan 1 – £18,935
• Plan 2 – £25,725.
Student loan deductions will remain the same at 9% for Plan 1 and Plan 2 loans.

Postgraduate Loans

DfE had launched a new student loan product
known as PGL. The earliest repayment of PGL can start is April 2019.
DfE has confirmed the student loan threshold for PGL for England and Wales will be
£21,000, with deductions being taken at 6%.
In the lead up to 6 April 2019 HMRC will be issuing more detailed guidance on GOV.UK

 

DMS Posts

Making Tax Digital: how VAT businesses and other VAT entities can get ready

Introduction

If you run a VAT-registered business with a taxable turnover above the VAT registration threshold (currently £85,000) you are required to keep digital VAT business records and send returns using Making Tax Digital (MTD)-compatible software for VAT periods starting on or after 1 April 2019. Businesses with a taxable turnover below the VATthreshold can also sign up for MTD for VAT voluntarily. This also applies to other VATentities, such as charities, government bodies and limited companies.

The MTD for VAT pilot started in April 2018 and is currently in a private stage, available only to invited volunteer VAT businesses and their agents. This is so we can work with software providers, testing our systems and their products on a small scale before opening MTD to a wider audience. At the moment we are limiting the number and types of business we invite into the pilot. We’ll provide more guidance about how to sign up to MTD for VAT on GOV.UK later in the year, but you can email us if you are interested in becoming involved in the private VAT pilot earlier.

If you have an agent, you should speak to them to find out when it may be best for you to join the pilot.

When MTD for VAT will be mandatory for your business

If you are registered for VAT and your taxable turnover is above the VAT registration threshold (currently £85,000), for accounting periods starting on or after 1 April 2019, you must keep digital business records and send your VAT returns to HMRC using MTD-compatible software.

If your taxable turnover drops below the VAT registration threshold at any point after 1 April 2019 you are still required to continue to keep digital records and send HMRCyour VAT returns using MTD-compatible software. This obligation doesn’t apply if you de-register from VAT or if you are exempt from MTD for VAT.

What happens if your taxable VAT turnover is below the VAT MTD threshold

If your business has a taxable turnover below the VAT threshold you can still sign up for MTD voluntarily. HMRC is encouraging businesses with a taxable turnover below the VAT threshold to sign up so they can also benefit from MTD. Businesses can also sign up for MTD for Income Tax. This means, subject to your business type, you can further streamline your business processes. You can read more about MTD for Income Tax further down.

Software will help you stay on top of business record keeping, allowing you (and your agent, if you have one) to better understand how your business is performing.

What your business needs to do to be ready to sign up for MTD

You will need to keep your business records digitally from the start of your accounting period. If you already use software to keep your business records, check your software provider’s plans to introduce MTD-compatible software.

If you don’t currently use software, or your software won’t be MTD-compatible, you’ll need to consider what software is suitable for your requirements.

We’ll publish details of the VAT software available later in the year, when we open the VAT pilot to more businesses. Read about software providers currently supporting MTDfor VAT.

Using spreadsheets for your business records

A spreadsheet can be used to calculate or summarise VAT transactions to arrive at the return information you need to send HMRC.

If you use spreadsheets to keep business records, you’ll need MTD-compatible software so that you can send HMRC your VAT returns and receive information back from HMRC. Bridging software may be required to make spreadsheets MTD-compatible. You can read what we mean by ‘bridging software’ below.

The information must not be physically re-typed into another software package.

Records that you need to keep digitally for MTD for VAT

MTD does not require you to keep additional records for VAT, but to record them digitally.

Your digital records should include, for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged. They should also include information about your business, including business name and principle business address, as well as your VAT registration number and details of any VATaccounting schemes you use.

MTD-compatible software

Compatible software is a software product or set of software products that between them support the MTD obligations of keeping digital records and exchanging data digitally with HMRC through the MTD service. If more than one application is being used, data that flows between those applications must also be exchanged digitally.

Digital records can be kept in a range of compatible digital formats. They do not all have to be held in the same place or on one piece of software. For example, a spreadsheet can be a component of digital record keeping provided the product that consolidates records, or summary records from the spreadsheet, can exchange data digitally with HMRC.

HMRC will give businesses until 31 March 2020 to make sure there are digital links between software products. Before that date, cut and paste will be an acceptable way to transfer information.

The exception to this is where return information is to be transferred to a software product enabled for an Application Programming Interface (an API provides a secure link between software and HMRC) and designed to submit the 9-box VAT return (such as bridging software). In those circumstances the transfer of information must only be digital.

If in doubt, businesses should discuss with their agent or software provider.

Bridging software

‘Bridging software’ is HMRC’s description of the digital tool that can take information from other applications, for example, a spreadsheet or an in-house record keeping system, and lets the user send the required information digitally to HMRC in the correct format.

 

Making Tax Digital: how VAT businesses and other VAT entities can get ready

DMS Posts

VAT Notice 700/22: Making Tax Digital for VAT

This notice provides information further to the provisions of The Value Added Tax (Amendment) Regulations 2018 (SI 2018 No. 261), which amend the VAT Regulations 1995 (‘the regulations’).

Parts of this notice include rules that have the force of law under the regulations. These rules are indicated by being placed in a box. Unless otherwise indicated within the rule, all of the rules contained in this Notice have the force of law from the date the regulations have the force of law.

Introduction

1.1 What this notice is about

This notice gives guidance on the digital record keeping and return requirements for Making Tax Digital for VAT. This notice is not a standalone document and should be read in conjunction with other VAT notices, in particular the ones listed at paragraph 1.3below. These are all available on GOV.UK.

1.2 Making Tax Digital explained

Making Tax Digital for VAT requires VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT Returns using software.

It is increasingly common for business records and accounts to be kept digitally, in a software program on a computer or tablet, or in a smartphone application, or maintained through such a device and stored using a cloud-based application. The difference under Making Tax Digital is that the software which businesses use must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT Returns using the information maintained in those digital records and communicating with HMRC digitally via our Application Programming Interface (API) platform.

If your digital records are up to date, software will be able to collate and prepare your return for you. It will then show the return to you and ask you to declare that it is correct and confirm that you want to submit it to HMRC. Once you have submitted your return you will receive confirmation through your software that it has been received.

This notice provides further details of the Making Tax Digital rules.

1.3 Other helpful notices

You may find it helpful to read these notices on related subjects:

VAT Notice 700: VAT guide
VAT Notice 700/21: keeping VAT records
VAT Notice 700/1: should I be registered for VAT?
VAT Notice 700/12: how to fill in and submit your VAT Return
VAT Notice 700/45: how to correct VAT errors and make adjustments or claims
VAT Notice 718: the Margin Scheme and global accounting
VAT Notice 727: retail schemes
VAT Notice 733: Flat Rate Scheme for small businesses
VAT Notice 700/21: The special accounting scheme for gold transactions
VAT Notice 709/5: Tour Operators Margin Scheme for VAT

Make sure you have read the notices relevant to your circumstances before you submit your VAT Return.

Check if you have to follow the Making Tax Digital rules

2.1 Turnover test (exemption on the grounds of taxable turnover)

With effect from 1 April 2019, if your taxable turnover is above the VAT registration threshold you must follow the rules set out in this notice. If your taxable turnover subsequently falls below the threshold you will need to continue to follow the Making Tax Digital rules, unless you deregister from VAT or meet other exemption criteria (see paragraph 2.2 of this notice).

Only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital. You will therefore need to keep an eye on your taxable turnover, especially if you think it is close to the VAT registration threshold.

VAT taxable turnover is the total value of everything you sell that is not exempt from VAT. VAT Notice 700/1: should I be registered for VAT provides more information on the VAT registration threshold and taxable turnover.

2.1 .1 Find out when the Making Tax Digital rules start

The Making Tax Digital rules apply from your first VAT period starting on or after 1 April 2019. A ‘VAT period’ is the inclusive dates covered by your VAT Return.

Example 1 – Existing business with taxable turnover above the VAT registration threshold on 1 April 2019

A business submits a quarterly return covering the period 1 March to 31 May 2019. The business taxable turnover exceeds the VAT registration threshold and therefore the business will need to comply with Making Tax Digital rules for the period starting 1 June 2019.

Example 2 – Business with a taxable turnover above the Making Tax Digital threshold at the point they need to register for VAT

A business that is not registered for VAT is required to register from September 2019 because the taxable turnover over the previous 12 months has exceeded the VAT registration threshold. The business must follow the rules in this notice for all VAT Returns they are subsequently required to make as their taxable turnover was above the VAT threshold when they were required to register.

Example 3 – VAT registered business with taxable turnover below Making Tax Digital threshold until November 2019

A business is registered for VAT but its taxable turnover is below the VAT registration threshold until November 2019. The business must follow the rules in this notice for any VAT period that starts on or after 1 December 2019 as its taxable turnover now exceeds the VAT registration threshold.

2.2 Other exemptions

You will not have to follow the Making Tax Digital rules where HMRC is satisfied that:

  • your business is run entirely by practicing members of a religious society whose beliefs are incompatible with the requirements of the regulations (for example, those religious beliefs prevent them from using computers)
  • it is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason
  • you are subject to an insolvency procedure

These may apply even if you are not currently exempt from online filing for VAT.

If you think any of these apply to you then contact the VAT Helpline to discuss alternative arrangements. If HMRC consider that an exemption is not appropriate, digital assistance may be available to help you get online support.

2.3 How you can choose not to be exempt from the rules

If you are exempt from Making Tax Digital you may still choose to follow the Making Tax Digital rules.

To do this, you must tell HMRC before the start of the next VAT period that you want to use the Making Tax Digital service and also the date that your next VAT period begins. You will then be subject to the Making Tax Digital rules from the start of that next VAT period.

You may decide, for a later period, that you no longer wish to follow the Making Tax Digital rules. If you are still exempt from Making Tax Digital at that point, you can tell HMRC you want to leave the Making Tax Digital service and submit returns the way you submitted them before you chose to follow the Making Tax Digital rules. This will be from the start of the next VAT period following the date you told us.

You must tell HMRC in writing if you want to join or leave Making Tax Digital.

Digital record-keeping

3.1 Digital record-keeping

All VAT registered businesses must keep and preserve certain records and accounts. Under Making Tax Digital, some of these records (see paragraph 3.3) must be kept digitally within functional compatible software (see paragraph 3.2). Records that are not specified in this notice, or that are not required to complete your VAT Return, do not need to be kept in functional compatible software.

Some software will record all your VAT records and accounts information. However, there are some records that by law must be kept and preserved in their original form either for VAT purposes or other tax purposes. For example you must still keep a C79 (import VAT certificate) in its original form.

Example 1

A business receives an invoice and types selected data contained in the invoice into functional compatible software. They must still keep the invoice in its original form as the data in the functional compatible software is not a copy of the invoice.

Example 2

A business has functional compatible software that scans the invoices received and puts the information in its ledger. If the image is retained and contains all the detail required for VAT purposes then the business does not need to keep the original invoice unless it is required for another purpose.

If you deregister from VAT you will no longer need to keep digital records in functional compatible software, but you must retain your VAT records for the required period.

VAT notice 700/21 provides more information on keeping VAT records.

3.2 Functional compatible software

Functional compatible software is a software program, or set of software programs, products or applications, that must be able to:

  • record and preserve digital records (see paragraph 3.3)
  • provide to HMRC information and returns from data held in those digital records by using the API platform
  • receive information from HMRC via the API platform

HMRC expects that there will be software products available that will perform all of the functions listed above. Some software programs will not be able to perform all of these functions by themselves. For example, a spreadsheet or other software product that is capable of recording and preserving digital records may not be able to perform the other 2 functions listed above, but can still be a component of functional compatible software if it is used in conjunction with one or more programs that do perform those functions.

The complete set of digital records to meet Making Tax Digital requirements does not all have to be held in one place or in one program. Digital records can be kept in a range of compatible digital formats. Taken together, these form the digital records for the VAT registered entity.

Data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create the digital journey.

It follows that transferring data manually within or between different parts of a set of software programs, products or applications that make up functional compatible software is not acceptable under Making Tax Digital. For example, noting down details from an invoice in one ledger and then using that handwritten information to manually update another part of the business functional compatible software system.

A ‘digital link’ is one where a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications. That is without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between 2 or more pieces of software.

A digital link includes linked cells in spreadsheets, for example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.

HMRC will also accept digital links as:

  • emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation)
  • transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to an agent to import that data into their software
  • XML, CSV import and export, and download and upload of files
  • automated data transfer
  • API transfer

This list is not exhaustive.

HMRC does not consider the use of ‘cut and paste’ to select and move information, either within a software program or between software programs, to be a digital link.

HMRC will allow a period of time (‘the soft landing period’) for businesses to have in place digital links between all parts of their functional compatible software.

For the first year of mandation (VAT periods commencing between 1 April 2019 and 31 March 2020) businesses will not be required to have digital links between software programs. The one exception to this is where data is transferred, following preparation of the information required for the VAT Return, to another product (for example, a bridging product) that is API-enabled solely for the purpose of submitting the 9 Box VAT Return data to HMRC. The transfer of data to this product must be digital.

For the first year of mandation (VAT periods commencing between 1 April 2019 and 31 March 2020), where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.

The following rule has the force of law:

A digital link is an electronic or digital transfer or exchange of data between software programs, products or applications.

The use of ‘cut and paste’ does not constitute a digital link.

The following rule has the force of law:

If a set of software programs, products or applications are used as functional compatible software there must be a digital link between these pieces of software.

This digital link is required where the data to be included in any of the boxes of the VAT Return has been prepared within a software program, product or application, and this data is then transferred to another program, product or application in order to submit the VAT Return data to HMRC via the APIplatform.

For VAT periods starting on or after 1 April 2020, there must be a digital link for any transfer or exchange of data between software programs, products or applications used as functional compatible software.

3.2 .1.2 VAT calculations made outside of software

HMRC recognises that there may be points during preparation of your VAT Return when calculations will have to be made outside of any software you use to keep the digital records, or there may be a need to enter data into your software from particular sources. For example a capital goods scheme adjustment calculation done in a separate spreadsheet may need some form of input by hand into the software that will send your VAT Return information to HMRC.

3.2 .2 Submission of information to HMRC

The submission of information to HMRC must always be via an Application Programming Interface (API). While HMRC expects most businesses to use API-enabled commercial software packages both to keep digital records and file their VAT Returns, the following alternatives may be available.

3.2 .3 Bridging software

This is a digital tool (incorporating relevant Making Tax Digital APIs) that is used to connect accounting software to HMRC systems, and allows the required VAT information to be reported digitally to HMRC, and for information to be sent digitally back to the business from HMRC.

3.2 .3 .1 API-enabled spreadsheets

These are spreadsheets that incorporate relevant Making Tax Digital APIs. They can either:

  • combine with accounting software to submit the required VAT information digitally to HMRC, and allow information to be sent back to the business digitally from HMRC
  • be used to keep digital records and then directly submit the required VAT information digitally to HMRC

3.2 .4 Introducing the examples in section 7 of this notice

The examples in Section 7 include a number of examples of situations where a VAT registered entity is using a set of software programs with digital links that meet the requirements of Making Tax Digital. The examples also include situations where the transfer of data between programs does not need to be via a digital link as well as situations where a digital link is not mandatory for VAT periods starting before 1 April 2020.

3.3 Records that must be kept digitally

The records listed in the following paragraphs must be kept, maintained and preserved in digital form. The regulations refer to this information as your ‘electronic account’. The exact way you must enter the information will depend on the software package you have. Contact your software provider if you are unsure how to enter information into your software. HMRC can only provide advice on the legal requirements of Making Tax Digital.

You will need to keep additional records, such as invoices. You do not have to keep these digitally but you may choose to do so. For more information on the additional records that must be kept for VAT purposes, see VAT Notice 700/21: keeping VAT records.

3.3 .1 Designatory data

You must have a digital record of:

  • your business name
  • the address of your principal place of business
  • your VAT registration number
  • any VAT accounting schemes that you use

3.3 .2 Supplies made

For each supply you make you must record the:

  • time of supply (tax point)
  • value of the supply (net value excluding VAT)
  • rate of VAT charged

This only includes supplies recorded as part of your VAT Return. Supplies that do not go on the VAT Return do not need to be recorded in functional compatible software. For example intra-group supplies for a VAT group are not covered by these rules.

The time of supply is the date that you must declare output tax on. Typically this is when you send a VAT invoice or, if you are on cash accounting, when you receive payment for the supply. For more information on time of supply, see VAT Notice 700: VAT guide, section 14 and section 15.

Where more than one supply is recorded on an invoice and those supplies are within the same VAT period and are charged at the same rate of VAT you can record these as a single entry.

Example 1

You sold 10 standard rated items and 15 zero rated items on a single invoice then you would only need to record the total figures for each of the VAT rates.

Example 2

You are on standard accounting and a customer makes a part payment before you send out an invoice. If the payment and invoice were received and sent in the same period, you can record the supply as one transaction with one transaction date. Otherwise, where one supply needs to be recorded in different periods the precise manner will depend on the software. This could be done by splitting the amounts out, or the software may allow one line to show different periods for the VAT to be recorded.

You must also have a record of outputs value for the period split between standard rate, reduced rate, zero rate, exempt and supplies which are outside the scope of UK VAT. However, you only need to keep a digital record of ‘outside the scope’ supplies that you are required to include in your VAT Return.

For more information on completing your VAT Return, see VAT Notice 700/12.

The following rule has the force of law:

Where you need to apportion the output tax due on a mixed rate supply with a single inclusive price you do not have to record these supplies separately. You can record the total value and the total output tax due.

Not all software will allow you to record a rate of VAT other than the standard, reduced or zero/exempt. If this is the case, this mixed supply should be recorded as either one standard rated supply and one zero rated supply or you can record the sale at one rate and correct the VAT through an adjustment at the end of the period. You will also need to do this if you are using a margin scheme or the flat rate scheme.

Example 3

A business sells a meal deal for £3. It contains a zero rated sandwich, a standard rated pack of crisps and a standard rated drink. The apportionment shows that the VAT due is 30p. The business can record this as an individual supply with 30p of output tax if their software allows this. Below are 3 potential ways this could be recorded.

(i) Software allows input of total VAT

The value of the supply (net value excluding VAT) £2.70
Total VAT charged: £0.30

(ii) Meal deal recorded as standard rated and zero rated supplies

If their software does not allow this they could record the supply as a standard rate element of £1.50 and a zero rated element of £1.20.

Element 1 (standard rated portion)

The value (net value excluding VAT) £1.50
The rate of VAT charged: Standard rate

Element 2 (zero rated portion)

The value (net value excluding VAT) £1.20
The rate of VAT charged: Zero rate

(iii) Supply recorded at one rate and VAT corrected at the end of the period

Alternatively, they could record the meal deal as one entry and correct the VAT at the end of the period.

The value of the supply (net value excluding VAT) £2.70
The rate of VAT charged: Standard rate
Adjustment to correct mixed rate VAT: -£0.24

3.3 .2.1 Supplies made by third party agents

A third party agent can act for, or represent, a business in arranging supplies of goods or services. The supplies that you arrange are made by, or to, the business represented.

HMRC is aware of a number of circumstances in which a third party agent makes supplies on behalf of a business and it may not be possible or practical for the business to record digitally every single supply. Therefore HMRC can accept businesses recording these digitally as a single invoice.

The following rule has the force of law:

Where a third party agent makes supplies on your behalf, those supplies do not fall within the digital record keeping requirements until you receive the information from the agent. Where the information is received as a summary document you can treat this document as one invoice issued by you for the purpose of creating your digital record.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

Further information on supplies made by or through agents can be found in VAT Notice 700: VAT guide, section 22 to section 25.

Example 4

A business uses a letting agent to rent out a number of properties. Each month the letting agent provides a summary of the rents collected and VAT charged. The business can treat all supplies covered in this summary document as if they were covered by a single sales invoice, rather than treating each invoice issued on their behalf separately. They can group transactions together providing they are within the same VAT period and are charged at the same rate of VAT.

This rule would not cover circumstances where responsibility for supplies is assumed by other persons who are not third party agents of the business. For example it does not cover supplies made by an employee on behalf of your business or by a charity volunteer for the purposes of a fundraising event such as a church fete.

3.3 .3 Supplies received

For each supply you receive you must record the:

  • time of supply (tax point)
  • value of the supply
  • amount of input tax that you will claim

This only includes supplies recorded as part of your VAT Return, supplies that do not go on the VAT Return do not need to be recorded in functional compatible software. For example, wages paid to an employee would not be covered by these rules.

There is no requirement under the regulations to record inputs for the period split by VAT rate.

The time of supply is typically the date on the VAT invoice or, if you are on cash accounting, when you pay for the supply. However you must also hold the associated evidence to claim deduction of input tax. For more information on time of supply, see VAT Notice 700: VAT guide, section 14 and section 15 and also paragraph 10.5 of that same Notice for information on timescales for claiming input tax.

If more than one supply is on an invoice you can record the totals from the invoice. Where the amount of input tax that you will claim is not known at the time you record the supply you have received, you can record:

  • the total amount of VAT and adjust for any irrecoverable VAT once calculated
  • no VAT and adjust for any recoverable VAT once calculated
  • VAT recoverable based on an estimated percentage and adjust for any VAT once calculated

See paragraph 3.4 of this Notice for information on adjustments.

Where an invoice includes supplies with different times of supply that are within the same VAT period, you may record all supplies on the invoice as being at the same date.

Example 1

A business uses cash accounting and has paid the amounts on the invoice over 3 months. Two of the months are in the same VAT period so can be recorded together. The payments relating to the other month must be recorded separately. The precise manner of recording the information in different periods will depend on the software. This could be done by splitting the amounts out, or the software may allow one line to show different periods for the VAT to be recorded.

If a business pays the actual cost or a proportion of the travel and subsistence cost of an employee, it can claim the total or a proportion of the total input tax incurred.

The following rule has the force of law:

Where you are claiming input tax on employee expenses and your employee provides the combined value of more than one purchase, you do not have to record each purchase separately. You can record the total value and the total input tax due.

Further information on subsistence and the effect on input tax claims can be found in VAT Notice 700: VAT guide, section 12.

3.3 .3.1 Supplies received by third party agents

A third party agent can act for, or represent, a business in arranging supplies of goods or services. The supplies that you arrange are made by, or to, the business represented.

HMRC is aware of a number of circumstances in which a third party agent makes purchases on behalf of a business and it may not be possible or practical for them to record digitally every single supply received. Therefore HMRC can accept businesses recording these digitally as a single invoice.

The following rule has the force of law:

Where a third party agent makes purchases on your behalf, those purchases do not fall within the digital record keeping requirements until you receive the information from the agent. Where the information is received as a summary document you can treat this document as one invoice received by you for the purpose of creating your digital record.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

Further information on supplies made by or through agents can be found in VAT Notice 700: VAT guide, section 22 to section 25.

3.3 .4 Reverse charge transactions

If your software records reverse charge transactions you do not need separate entries for the self supply and purchase. If your software does not record reverse charge transactions you will need to record reverse charge transactions twice, once as a supply made and a second time as a supply received.

For information on reverse charge transactions see VAT Notice 741A: VAT place of supply of services, section 5.

3.3 .5 Summary data

To support each VAT Return you make, your functional compatible software must contain:

  • the total output tax you owe on sales
  • the total tax you owe on acquisitions from other EU member states
  • the total tax you are required to pay on behalf of your supplier under a reverse charge procedure
  • the total input tax you are entitled to claim on business purchases
  • the total input tax allowable on acquisitions from other EU member states
  • the total tax that needs to be paid or you are entitled to reclaim following a correction or error adjustment, and
  • any other adjustment allowed or required by VAT rules

A total of each type of adjustment must be recorded as a separate line.

3.4 Adjustments

Where you are allowed or required to adjust the input tax claimed or output tax you owe according to the VAT rules you must record this adjustment in functional compatible software. Only the total for each type of adjustment will be required to be kept in functional compatible software, not details of the calculations underlying them.

If the adjustment requires a calculation, this calculation does not have to be made in functional compatible software. If the calculation is completed outside of functional compatible software then digital links are not required for any information used in the calculation. However using software for all your calculations will reduce the risk of errors in your returns.

The following rule has the force of law:

Where the input tax claimed or output tax due on a supply has been changed as the result of an adjustment you do not need to amend the digital record of the supply.

Example 1

A partly exempt business software allows it to record amounts of VAT relating to both exempt and taxable supplies. At the end of the period they complete a partial exemption calculation and put the adjustment into their return. The calculation is not completed in the software. The business does not have to go back and change each line in the software to reflect the amount of recovery on each invoice.

Example 2

A business has a software package that requires a period to be closed before the return can be completed. After the period has been closed the business is calculating adjustments before submitting the return. Invoices are found that should be included on the return. The business can enter the figures as an adjustment to ensure the return is correct, but they must record the invoices in their functional compatible software to complete their digital records.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

3.4 .1 Correcting errors

Error corrections are made by one of 2 methods.

For more information on correcting errors, refer to VAT Notice 700/45: how to correct VAT errors and make adjustments or claims.

The following rule has the force of law:

Where a business makes an error correction using method 2, they are not required to amend the input tax claimed or output tax charged recorded in the digital record of the supply.

Example 3

A business notices an error in its records. The total value of the error is £65,000 so the business must correct the error using error correction method 2. The business does not have to make any changes in its functional compatible software, but must keep all records as normal.

This relaxation only varies the requirements on maintaining records using functional compatible software. It does not change any other record keeping requirements set out in VAT legislation.

3.5 Retail schemes

The following rule has the force of law:

In addition to the records listed in paragraph 3.3 above, if you account for VAT using a retail scheme you must keep a digital record of your Daily Gross Takings (DGT). You are not required to keep a separate record of the supplies that make up your DGT within functional compatible software.

For more information on retail schemes and Daily Gross Takings see VAT notice 727: retail schemes.

3.6 Flat rate scheme

The following rule has the force of law:

If you account for VAT using the Flat Rate Scheme:

  • you do not need to keep a digital record of your purchases unless they are capital expenditure goods on which input tax can be claimed
  • you do not need to keep a digital record of the relevant goods used to determine if you need to apply the limited cost business rate

If your software does not include a Flat Rate Scheme setting, and does not allow you to include a rate of VAT other than standard, reduced, zero/exempt, then you will need to record the supply as either one standard rated supply and one zero rated supply. Alternatively, you can record the sale at one rate and correct the VAT through an adjustment at the end of the period, using the same method HMRC will allow you to use to correct the VAT on a mixed supply (see paragraph 3.3.2 above).Further information on the Flat Rate Scheme can be found in VAT Notice 733: Flat Rate Scheme for small businesses.

3.7 Gold Special Accounting Scheme

The following rule has the force of law:

In addition to the records listed in paragraph 3.3 above, if you make any sales under the Gold Special Accounting Scheme, you must keep a digital record of the following:

  • value of sales made under the special accounting scheme for gold
  • total output tax on purchases under the special accounting scheme for gold

3.8 Margin schemes

You are not required to keep the additional records required for these schemes in digital form, nor are you required to keep the calculation of the marginal VAT charged in digital form. These records must still be maintained in some format.

If you do keep a digital record and your software does not allow you to record the VAT on the margin, then you will need to record the supply as either one standard rated supply and one zero rated supply. Alternatively, you can record the sale at one rate and correct the VAT through an adjustment at the end of the period, using the same method HMRC will allow you to use to correct the VAT on a mixed supply (see paragraph 3.3.2above).

Further information on Margin Schemes can be found in VAT Notice 718: the Margin Scheme and global accounting and VAT Notice 709/5: Tour Operators Margin Scheme for VAT.

Voluntary updates

VAT updates is a feature of Making Tax Digital that will be available at a future date. They will allow businesses to provide VAT information to HMRC outside of a VAT Return voluntarily. A VAT update will not include different information to that submitted in a VAT Return. Further information and detail about this functionality will be published in due course.

Supplementary data

Supplementary data is a feature of Making Tax Digital that will be available at a future date. It will be voluntary. HMRC will specify what supplementary data will be, but broadly this will be information that supports the 9 box VAT Return that is the summary data described in paragraph 3.3.5 above. You will be able to submit supplementary data each time you submit a voluntary VAT update or VAT Return. Further information and detail about this functionality will be published in due course.

Agents

You may authorise HMRC to receive data from (and send data to) an agent on your behalf in relation to any Making Tax Digital service. Once you have done this, that agent can sign up your business to that service, and use software to create, view, edit and send your data to HMRC. Your agent may also keep and maintain digital records on your behalf. If you have previously authorised HMRC to receive your VAT Return from an agent they can still do this. Agents will not need to be re-authorised by their clients to act for them in the Making Tax Digital VAT service where they already have existing authorisation to act for VAT purposes.

You will be able to have more than one agent if you wish, performing different Making Tax Digital services for you, and you will be able to manage different levels of permission for each of them.

Agents will need to sign up to a new agent services account to use Making Tax Digital services on behalf of their clients. The agent must have software of their own or have access to the software that holds your digital records.

Agents will not necessarily have access to all of your source data so, for example, they may not always be able to make corrections to your digital records. In these circumstances your agent will need to advise you of any corrections required to those digital records.

HMRC will provide access to taxpayer information we hold, and the necessary services, only to those agents who have been properly authorised.

The examples set out here are intended to illustrate the extent to which a digital link is required between programs within a set of software programs used by a business or its agent. They show where information transfer must be digital and where it need not be, taking into account the variety of digital record keeping and reporting options that businesses will have.

These scenarios are not intended to be exhaustive or prescriptive; they merely illustrate the more common ones.

The image below contains the index of scenarios for:

  • using a single API-enabled software package
  • using API-enabled software and accounting software
  • using a spreadsheet and bridging software
  • using multiple spreadsheets and bridging software
  • using accounting software, a spreadsheet and bridging software
  • VAT groups or different parts of the same business
  • adjustments, journeys and transfers outside of software
  • digital transfers and adjustments within an agent journey using agent’s API-enabled software
  • digital transfers and adjustments within an agent journey using client’s API-enabled software

The image also contains a key for:

  • API – API for direct submission of VAT Return data to HMRC – submission of data via API is always digital
  • mandatory digital link – data must be imported or exported between programs without manual intervention – data transfer must always be digital
  • digital link – data should ideally be imported or exported between programs digitally, but in first year a ‘soft landing’ will be applied to allow businesses time to update legacy systems
  • data input or export may be digital or manual
Index of scenarios and a key slide

Example 1 – Using a single API-enabled software package

The image below describes a business that uses a single functional compatible software package.

It uses a single software product to record all sales, purchases, and expenses in a digital format. The software has the necessary functionality to maintain the mandatory digital records, prepare the VAT Return, and submit this to HMRC via an API. In this situation, all data transfer must be digital.

Using a single API enabled software package slide

Example 2 – Using API-enabled software and accounting software

The image below describes a business that uses accounting software and API-enabled software.

It uses the accounting software to record all sales, purchases, and expenses in a digital format, and then transfers the totals for each of these to API-enabled software which prepares the VAT Return. The API-enabled software has the necessary functionality to maintain the mandatory digital records, prepare the VAT Return, and submit this to HMRC via an API.

During the soft landing period, HMRC will not require a digital link between the accounting software and the API-enabled software. However, for VAT periods commencing from 1 April 2020, there must be a digital link between the software.

Using API enabled software and accounting software

Example 3 – Using a spreadsheet and bridging software

The image below describes a business that uses a spreadsheet and bridging software from April 2019, which allows the information to be transferred to HMRC via an API.

It uses a spreadsheet to record all sales, purchases, and expenses in a digital format. The VAT Return is then prepared within the spreadsheet, using formulae already written into the spreadsheet.

The VAT Return information is then sent via a mandatory digital link to bridging software, which digitally submits the information directly to HMRC.

Using a spreadsheet and bridging software

Example 4 – Using multiple spreadsheets and bridging software

The image below describes a business that uses more than one spreadsheet, linked to bridging software.

A business uses 2 spreadsheets to record sales, purchases, and expenses in a digital format. A third and final spreadsheet is designed to receive information from the record keeping spreadsheets and prepare the VAT Return. This final spreadsheet is digitally linked to bridging software, which submits the VAT Return to HMRC via an API. (As an alternative to bridging software, the final spreadsheet could have API functionality built into it.)

During the soft landing period, HMRC will not require the spreadsheets that supply the relevant data for the final spreadsheet to have a digital link. However, for VAT periods commencing from 1 April 2020, there must be digital links to the final spreadsheet.

Using multiple spreadsheets and bridging software

Example 5 – Using accounting software, a spreadsheet and bridging software

The image below describes a business that uses 3 pieces of software:

  • spreadsheets
  • accounting software
  • bridging software

It uses accounting systems or general ledgers (which are not API-enabled) to record all sales, purchases, and expenses in a digital format, and then transfers the totals of each of these into a spreadsheet used to prepare the VAT Return. This spreadsheet may also be used for any Partial Exemption calculation that is required. The return information in the spreadsheet is then sent via a mandatory digital link to bridging software, which submits the VAT Return to HMRC via an API. (As an alternative to bridging software, the spreadsheet could have API functionality built into it.)

Altogether the 3 separate pieces of software maintain the digital electronic records required by the regulations, prepare the return and submit it to HMRC. During the soft landing period between 1 April 2019 and 31 March 2020, HMRC will not require a digital link to exist between the non-API-enabled software and the spreadsheet. However, all information must be transferred between software programs using a digital link for VAT periods commencing from 1 April 2020.

Using accounting software, a spreadsheet and bridging software

Example 6 – VAT groups or different parts of the same business

The image below describes VAT groups or different parts of the same business where each member of the VAT group (or different area of a business with a single VAT registration) uses their own software to keep and maintain digital records. This might include a local authority, a farming business with a separate farm shop or B&B, or a large estate. The group or business uses one spreadsheet to prepare the VAT Return information and bridging software.

Each group member’s software calculates the required information needed for their part of the VAT Return. Each group member’s software then sends this information by a digital link, to a spreadsheet which is used to compile the totals for the group and prepare the VAT Return for the whole of the group. The return information in the spreadsheet is then sent via a mandatory digital link to bridging software, which submits the VAT Return to HMRC via an API. (As an alternative to bridging software, the spreadsheet could have API functionality built into it.)

Together, the separate pieces of software maintain the digital records required by the regulations, prepare the VAT Return and submit the return to HMRC.

During the soft landing period between 1 April 2019 and 31 March 2020, HMRC will not require a digital link to exist between each group member’s software and the spreadsheet. However, the links between the pieces of software must be digital from 1 April 2020 for the set of software to be considered functional compatible software for Making Tax Digital purposes. While HMRC expects that each group member will operate digital links within the software that it uses, it does not expect the software systems of each group member to be linked to other group members’ software systems for VAT purposes if there is no need for them to transfer 9 box VAT Return information between the members.

VAT Groups or different parts of the same business

Example 7 – Adjustments, journeys and transfers outside of software

The image below describes a business that uses API-enabled accounting software and spreadsheets.

It uses the API-enabled accounting software to record all sales, and purchases, and expenses in a digital format. This software is able to prepare the VAT Return. However, the business uses a spreadsheet to calculate adjustments such as a partial exemption calculation or working out road fuel scale charges. Information from the API-enabled software such as inputs, outputs and totals, is transferred to the spreadsheet either via a digital link or by manual transfer. The spreadsheet uses this data to calculate any adjustments, and these adjustments are transferred back into the API-enabled accounting software, which calculates and submits the VAT Return.

As the calculations in the spreadsheet are not required to be kept digitally in functional compatible software, the business can type the adjusted figures into its API accounting software. However, using a digital link for these processes, rather than a manual transfer, reduces the chance of errors.

Adjustments, journeys and transfers outside of software

Example 8 – Digital transfers and adjustments within an agent journey using agent’s API-enabled software

The image below describes a business that uses accounting software and employs an agent to prepare and submit its VAT Return using the agent’s API-enabled software.

The business uses accounting software to record all sales, purchases, and expenses in a digital format. It transfers this information to the agent through a link which must be digital for VAT periods commencing from 1 April 2020.

Once the data is transferred, the agent uses their API-enabled software to prepare the VAT Return for the business. Any amendments that are made outside of the agent’s software (for instance, in a spreadsheet), from correcting mistakes to adjustments required by VAT law, is entered into the agent’s functional compatible software. These amendments are part of the required digital records. This means these changes must be either recorded in the client’s records or the agent must store the changes and allow the client can access to the records. The agent’s software then prepares the VAT Return and submits this to HMRC via an API.

As the adjustments made outside of the agent’s software are not required to be kept digitally in functional compatible software, the agent can type the adjustment into their accounting software. However, using a digital link for these processes, rather than a manual transfer reduces the chance of errors.

Digital transfers and adjustments within an agent journey using agent’s API-enabled software

Example 9 – Digital transfers and adjustments within an agent journey using business’ API-enabled software

The image below describes a business that uses a single functional compatible software package but also uses an agent to calculate adjustments, which the agent does using its own software.

The business uses its software package to keep its digital records and prepare and submit the VAT Return. It gives the agent access to its software. Depending on the needs of the business, agents may be given access to either the client’s full set of information or only be given a limited view. The agent selects the necessary data to enable it to make adjustments in its own software.

Any corrections or amendments must be reflected in the client’s digital records. Adjustments may be made in the business’ software by the agent manually. However using a digital link to transfer the information will reduce the chance of errors. Once amendments have been fed back into the VAT Return, the return is digitally submitted from the business’ software to HMRC via an API.

Together, all the software described above (business’ software and agent’s software) maintain digital records as required by the regulations, prepare the VAT Return and submit the return to HMRC.

Digital transfers and adjustments within an agent journey using client’s API-enabled software
DMS Posts

Dividend waiver: what you need to know

Why waive your right to a dividend?

There are various reasons why shareholders may wish to create a dividend waiver:

  • It may be that a founder is no longer active on a day-to-day basis with the company but doesn’t want to relinquish their stake in the company completely by selling their shares. In this case the founder shareholder may opt to waive their right to a dividend when profits are distributed amongst shareholders
  • Alternatively, a family company may wish to share some of its profits with family members whilst retaining the remaining profit in the company to fund further growth. In this case the parents may waive their dividend while paying dividends to their children

Deed of waiver form

If you or your shareholders need to waive dividends, then there is a process to follow to ensure that the correct records are kept:

  1. For final dividends, the waiver must be in place BEFORE the right to receive a dividend arises. For interim dividends then it must be in place before the dividend is paid.
  2. A Deed of Waiver is required for all shareholders waiving their dividend. This needs to be signed by the shareholder, witnessed and returned to the company
  3. The waiver may be for a set period or may be open ended

The HMRC view

Care must be taken that there are sound commercial reasons for waiving a dividend. If HMRC suspect that a dividend waiver may be being used for the avoidance of tax, then they are likely to take an interest.

Dividend payments are taxed at a lower rate than employment income due to national insurance contributions not being payable. The directors of a company may opt to reward their staff through payment of a dividend but waive their own dividend to increase the size of the dividend pot. If HMRC consider that the dividend payment is being made in lieu of salary, then they may take the view that the dividend should be taxed at the employment rate.

HMRC may test the dividends arrangement against the settlements legislation. HMRC state that the settlements legislation is likely to apply if:

  • The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.
  • Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
  • There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
  • The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
  • The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.

There are legal precedents where companies owned by married couples have used a dividend waiver to pay the party who is in a lower tax band a greater proportion of the profits. For example, Mr and Mrs Smith operate a property management business. Mrs Smith holds 80 shares and Mr Smith 20. Mrs Smith waives her right to any dividend. Having made a profit of £3,000 they decide to pay a dividend of £100 per share and Mr Smith receives a dividend of £2,000.

In this example HMRC are likely to use the Settlements legislation to challenge the payment as;

  • The company would be unable to pay the same rate of dividend to all shareholders if Mrs Smith had not waived her right to the dividend
  • Mr Smith the “non-waiving” shareholder is someone who Mrs Smith would wish to benefit from the waiver
  • Mr Smith is in a lower tax band than Mrs Smith and therefore would pay less tax than the waiving shareholder

A company may feel that rather than waiving dividends, an alternative approach would be to issue two share classes with different rights, one eligible to receive dividends and one not. However, this arrangement also risks being challenged by HMRC if the company’s retained profits were not enough to pay the dividend against all issued shares across the share classes.

To make sure that your dividend waiver does not draw the attention of HMRC, ensure that:

  • The dividend waiver is being made for a real business benefit and record this as part of the Deed of Waiver
  • The waived funds are retained by the company and not simply divided up between the shareholders who are receiving the dividend
  • The shareholder who is waiving their right to a dividend would be satisfied with the arrangement if the other shareholders were unrelated third parties (i.e. not people who the waiving shareholder would particularly wish to benefit)

Issuing dividends with dividend waivers

When creating dividend vouchers, Inform Direct makes it easy to identify shareholders who have signed a waiver. The system allows you to identify which shareholders have waived their dividend and whether this is for all the shares that they hold or just a proportion of them.

Download Deed of Waiver Template