Tag: MTD

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Draft regulations to enable MTD for VAT

Debonair Management Services Limted

Draft regulations to enable MTD for VAT reporting expose the muddled thinking behind the digitally linking of accounting software and spreadsheets.
Timing

Draft VAT regulations, and a notice to require taxpayers to comply with MTD reporting, were released for consultation on 18 December 2017, with a deadline for commenting set at 9 February 2018. This consultation period fits neatly over the busiest period for accountants and tax advisers, thus reducing the likelihood of detailed feedback from those who will be at the sharp end of the MTD regime, but I’m sure that is just a coincidence.

Digital records

What HMRC calls “functional compatible software” must be used record and preserve prescribed VAT related data (see below). That software must be used to calculate the VAT due, report the VAT figures (as per the current VAT return) to HMRC via an API, and to receive information back from HMRC.
The VAT related data includes: for each sale and purchase the business; the time of the supply, value and rate of VAT charged, or in the case of purchases, the amount of input VAT allowed. There is no requirement in the draft regulations that the electronic recording of this data must be done at the time the supply is made, or when the purchase is received. As long as the data is recorded electronically by the earlier of the date that the VAT return must be submitted, or is actually submitted, this will be sufficient (reg 32A para 8).

Mix and match

The business can use more than one piece of software to keep its digital records, but those separate software programmes must be “digitally linked”. HMRC provides three examples in the draft notice of what it means by digitally linked:
1. The business records transactions in accounting software (A), transfers the totals to spreadsheet (B) where adjustments are made for say partial exemption, then it uses another software package (C) to transfer the totals to HMRC. The transfer of data between A, B and C must all be done digitally.
2. The business uses accounting software to record all its transactions and to submit the VAT return. However, it uses a spreadsheet to work out the VAT adjustment on road fuel scale charges. That adjustment is manually typed into the main accounting package as a journal entry. As the road fuel adjustments are not part of the records which are prescribed to be kept digitally, the manual journal entry is permitted and the business is compliant with the MTD regulations.
3. A VAT group uses three different accounting packages (A1, A2, A3) for different companies in the group. The totals are collected in a spreadsheet (B) to create the VAT figures needed for the group VAT return. Spreadsheet B is then digitally linked to another software package (C) which is used to submit the group VAT return to HMRC. As long as software family A is digitally linked to B, which is also digitally linked to C, the requirements of the MTD regulations are met.

 

The digital linking of the accounting software to other submission software or to any spreadsheets used will apparently be a legal requirement, but the definition of exactly what digital linking means isn’t included in the draft VAT regulations currently out for consultation.

The reasoning behind digital linking is to avoid errors being introduced by human hand, but as it will be acceptable to make manual journal adjustments, and to perform manual calculations on spreadsheets as part of the process, the logic behind the digital linking falls completely flat.

It is clear from the slide pack provided with the draft regulations, the taxpayer will be permitted to record his transactions in a spreadsheet and transmit that spreadsheet by email or even on a USB stick to his tax agent. The agent then imports the data electronically from the spreadsheet into his own accounting software which is used to submit the figures to HMRC.
What remains the same

The VAT reporting dates won’t be changed. Businesses will report their VAT information by the same deadlines and for the same VAT quarters as they do currently. There will be no requirement to change VAT quarters to align with the accounting period or tax year, if those quarters do not already align.
The data provided to HMRC will be exactly the same as the totals currently submitted in the nine boxes of the VAT return. No additional information to back-up those totals will be required, but businesses will have the option to voluntarily submit supplementary data, such as the split of sales between different rates of VAT.

Exemptions

A business may be exempt from MTD reporting on any of the following grounds:
• Its turnover for the year ending with previous month is less than the VAT registration       threshold;
• The owners are practising members of a religious society, whose beliefs prevent the use

of computers;
• Disability of individual, or location of the business, which makes it impractical to use        digital tools; or
• It is subject to insolvency procedures.

If one of these circumstances applies the business will have to contact the VAT helpline to discuss alternative arrangements to submit their VAT figures. A business can’t choose to be exempt. If it is in fact exempt from MTD reporting, it can elect to submit MTD reports using suitable software before the start of the next accounting period.

Deregistration from VAT

Both the draft VAT Notice and the VAT regulations make it clear that a business is drawn into the MTD reporting regime if its annual turnover (which would be subject to VAT) exceeds £85,000. If the business turnover drops below £85,000 the business must continue to make MTD reports until it deregisters from VAT.

Next stage

If you have comments to make on the draft regulations or VAT Notice you can send them to makingtaxdigital.consultations@hmrc.gsi.gov.uk. or post them below and AccountingWEB will include those in its response.
The regulations will be subject to the negative resolution procedure – which means that if no MP, or member of the House of Lords, objects to the draft regulations, they are passed with no debate in Parliament.

 

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Making Tax Digital (update)

Debonair Management Services Limted

The government has published proposals concerning the introduction of MTD-VAT. This new information outlines how it expects the new system to operate, including details of voluntary data businesses can submit to support their VAT returns and calculations.

The government has set out some proposed changes to legislation to regulate the new VAT-MTD system and to make it mandatory for certain businesses. The deadline for responses is 10 November, with the government aiming to have new regulations in place by next April.

When will the new rules come into force?

The new regulations will come into effect on 1 April 2019. So the businesses affected (i.e those registered for VAT with turnover above the VAT registration threshold) will be required to keep certain information in digital format from that date. They will also be required to submit any VAT returns starting on or after 1 April 2019 via the MTD system.

What information will businesses be required to keep in digital form?

Businesses will be required to keep their “designatory data”, information about supplies made and received, and details of the VAT account in digital format.

The designatory data is the business name, principal place of business and VAT registration number, plus details of membership of any VAT schemes.

The information about supplies will include details of individual sales and purchases, including relevant tax dates, splits between different VAT rates or treatments (i.e. standard rate, reduced rate etc), and a breakdown of invoices and the VAT rates charged.

The VAT account provides an audit trail between the primary data and the values in the VAT submission. It will include adjustments such as corrections from previous returns, changes in consideration and relief for bad debts. Only the totals for each item are required to be kept digitally.

What information do businesses need to submit to HMRC?

Businesses are only required to submit the same (nine-box) information contained on the current VAT return. The VAT return frequency will remain the same, and those submitting monthly or annual returns can continue to do so. The deadlines for submission and payment will remain unchanged, although the government may review this if and when quarterly reporting becomes mandatory.

Can businesses submit additional information?

Businesses will be able to submit two new pieces of voluntary information – periodic updates and supplementary data to support their VAT submissions.

Periodic updates are additional VAT submissions, covering say one or two months, that can be submitted between mandatory VAT returns. The chances of businesses wanting to do this are low as the rules stand now, although these submissions will be a way of notifying HMRC of changes in designatory data such as a new address. These voluntary submissions won’t create a VAT liability or refund, and the mandatory VAT submissions will still be required in the normal way.

Businesses can also submit supplementary data, on a voluntary basis, to support the calculations behind a VAT return. The government will set out more details in the legislation, but it envisages this data being the relevant items from the VAT account (see above).

What about businesses below the VAT threshold?

Businesses with turnover below the VAT threshold can opt into MTD, and then opt back out again later. In both cases they will need to inform HMRC in writing.

What happens if turnover rises above the VAT threshold?

Under the current proposals, businesses under the threshold must monitor their income (i.e. the rolling total for the previous 12 months) and will remain outside the MTD requirements in say, March, if income was below the threshold in the twelve months to the end of February. Once a business is mandated to use MTD it cannot drop out again, even where turnover falls back below the registration threshold.

So do we need to press for any changes?

While many accountants have objections to MTD in general, there are some specific areas of the government’s proposals that raise concerns.

One is what happens when a business breaches the registration threshold part way through a VAT period? The digital record keeping requirements seem to start immediately, and the current VAT return (some of which would cover the period before MTD became mandatory) may also need to be submitted using MTD software. This could force the business to change software overnight, and possibly copy data from the old system to the new.

Another concern is a lack of clarity on what software businesses can or will be required to use. The condoc says a business caught by the new requirements must use “a software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)”. Would using a spreadsheet to maintain the records, and then manually typing the nine VAT values into the HMRC portal, be considered a “set of compatible software programs” meeting this requirement?

DMS Posts

Making Tax Digital

Debonair Management Services Limted

A HM Treasury statement from Paymaster General Mel Stride on 13th July confirmed that the requirements for digital quarterly reporting were being stripped back to cover only VAT in a revised roadmap for Making Tax Digital (MTD).

Those above the VAT threshold will have to start filing with MTD-compatible software from April 2019, but small businesses below the threshold “will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020,” the Treasury said.

Until today, the government’s public stance was that mandatory quarterly reporting under MTD would come into force from April 2018 for businesses over the VAT threshold that paid income tax. The requirement for all unincorporated businesses to join MTD at the same time was delayed by 12 months as part of the Budget announcements in March.

Introducing MTD under the original timetable was becoming increasingly improbable ever since late April when Theresa May called the general election and sent the civil service into purdah. The MTD clauses were stripped out of the Finance Bill to ensure it could be passed before Parliament dissolved, and the post-election chaos left no time to reintroduce them.

On the software side of the fence, HMRC has continued to work on the infrastructure and data exchange standards to make digital tax filing possible, but progress has been painfully slow. Reports from specialist accountants working in the sector suggest that significant numbers of freelance computer programmers have stopped working for HMRC because of the public sector IR35 rules that were introduced in April.

The MTD pilot scheme started with the new tax year, but only a few of the application programming interfaces are available for commercial software to share data with HMRC’s computers. HMRC is now indicating that these may be ready for testing by December 2017, but that would not leave a suitable gap for testing the system before the original deadline.

As the new financial secretary to the Treasury, Paymaster General Stride inherited responsibility for MTD and has “listened to concerns raised by parliamentarians, in particular the Treasury Select Committee, businesses and professional bodies about the pace of change”, the Treasury said.

As a result, “All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes,” the Treasury said. Those below the VAT threshold will be able to choose when to move to the new digital system.

Under the revised timetable:

Only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
They will only need to do so from 2019
Businesses will not be asked to keep digital records or to update HMRC quarterly, for other taxes until at least 2020
Small businesses will be able to file digitally on a voluntary basis for other taxes.
MTD timetable
The Treasury thinking – previously explained by numerous AccountingWEB members and professional representatives – is that VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly than they do now.

Making Tax Digital for VAT will go into a public beta test in the spring of 2018 and from April 2019, businesses above the VAT threshold will have to file their VAT returns with MTD-compatible software.