On 1st April 2022, Making Tax Digital (MTD), the government’s initiative to implement a fully digital tax system within the UK, will reach a new milestone: all VAT-registered clients will be required to follow MTD for VAT rules.
What are the rules?
MTD for VAT requires affected clients to keep digital records and file their VAT returns through MTD-compatible software like FreeAgent. Currently, only VAT-registered clients with a turnover above the VAT registration threshold of £85,000 a year are required to follow MTD for VAT rules.
From 1st April 2022, all VAT-registered clients, regardless of turnover, will be required to follow MTD for VAT rules, and the option to file VAT returns through HMRC’s website will no longer be available.
“We recognise that, as we emerge from the pandemic, it’s critical that everyone has enough time to prepare for the change, which is why we’re giving people an extra year to do so. We remain firmly committed to Making Tax Digital and building a tax system fit for the 21st Century” announced the new financial secretary Lucy Frazer.
Long time coming
This is the latest in a series of delays and deferrals in the MTD programme, which was proposed by Chancellor George Osborne in late 2015. The MTD start date for small businesses was first planned to be in April 2018, then the focus switched to MTD for VAT. The MTD for income tax programme was to be delayed until lessons had been learnt from the VAT roll-out.
MTD for VAT commenced on time for most VAT registered businesses for VAT periods starting on and after 1 April 2019 but a number of “complex” entities had a deferred start date to 1 October 2019. A similar deferral is now in place for general partnerships (ie not LLPs, mixed or corporate partnerships), with those “ordinary partnerships” due to enter MTD ITSA from April 2025.
There is no indication of when other more complex partnerships will have to join MTD, and we don’t know if the MTD for corporation tax project will start as planned in 2026 or not.
What is the base year?
The turnover for mandation into the MTD ITSA regime remains at only £10,000 per year, much to disappointment of many who were lobbying for a much higher entry threshold.
As the turnover threshold must take into account the taxpayer’s income from all of their sole-trader businesses, plus their rental income, HMRC needs to pull together several figures from the taxpayer’s self assessment tax returns. Only when the tax return totals reach the £10,000 threshold will HMRC issue a notice to file under the MTD regulations.
If MTD ITSA was mandated from 6 April 2023, the turnover test would need to apply to the figures reported in the 2021/22 tax return, submitted by 31 January 2023, and possibly turnover reported in the 2021/22. Both of those years were affected by the pandemic which reduced turnover and rental income for many businesses and landlords.
Local authority grants for businesses liable for business rates would also increase business turnover for those periods. The SEISS grants should not have been included in business turnover, but some taxpayers have reported them as such, leading to HMRC having to make many corrections taxpayers’ self-assessments for 2020/21, and possibly also for 2021/22.
As MTD ITSA will now start in April 2024 the base year for testing the MTD turnover threshold will be the tax year 2022/23. The turnover figures for that year should not be distorted by Covid-related grants, and hopefully will reflect normal trading beyond the pandemic for most businesses.
It was apparent that HMRC wanted all unincorporated businesses to switch to the tax year basis before the introduction of MTD ITSA in 2023, but this would make 2022/23 the difficult transitional year.
For businesses with an accounting year end that doesn’t approximate to the tax year, more than 12 months of profits would be assessed in 2022/23. This would have a knock-on effect for a wide range of allowances and charges, including NIC, student loan repayments and capital allowances, to name a few. There was just not enough time to write amendments to regulations in all the areas affected before April 2022.
What’s more using the tax year basis would bring forward the start of MTD ITSA for businesses with a 31 March year end, from 1 April 2024 to 6 April 2023 – which came as a big shock for many accountants and businesses.
The written statement from the new financial secretary to the Treasury, confirmed the change to the tax year basis will not come into effect before April 2024, with a transition year no earlier than 2023. The government will respond to the consultation on reforming basis periods “in due course” but the wording of this statement makes the change to the tax year basis look uncertain.
In a move hailed as a ‘victory for common sense’, the government has announced a 12-month delay to the introduction of the domestic reverse charge VAT for construction services, citing industry concerns and Brexit as the reasons behind the postponement.
In a short briefing on gov.uk, the government announced it would be putting the introduction of the domestic reverse charge for construction services on ice for a period of 12 months until 1 October 2020.
The brief explained that industry representatives had “raised concerns” that many construction sector businesses were not ready to implement the changes on the original date of 1 October 2019. To help them prepare, and to avoid the new rules kicking in at the same time as the UK’s potential exit from the European Union, the reverse charge has been delayed for 12 months until 1 October 2020.
‘Construction chaos’ avoided?
Industry insiders, including the largest trade association in the UK’s construction sector, had called on the government to delay the changes, citing research findings that the charge could lead to a spike in company insolvencies and ‘construction chaos’.
In a statement, HMRC said that it “remains committed” to introducing the charge and in the intervening year it will focus additional resource on identifying and tackling existing perpetrators of VAT-related fraud in the industry. HMRC also committed to working closely with the sector to raise awareness and provide additional guidance to make sure all businesses will be ready for the new implementation date.
The tax authority recognised that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC has stated that it will take into account the late change in its implementation date.
“Some businesses may have opted for monthly VAT returns ahead of the 1 October 2019 implementation date, which they can reverse by using the appropriate stagger option on the HMRC website,” said the statement.
‘Victory for common sense’
Reacting to the news, Brian Berry, Chief Executive of the Federation of Master Builders, hailed the decision as “sensible and pragmatic”.
“To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms,” said Berry.
The VAT road fuel scale charges are amended with effect from 1 May 2019. Businesses must use the new scales from the start of the next prescribed accounting period beginning on or after 1 May 2019.
The Valuation Table sets out the new scale charges (a VAT inclusive amount). This table must be operated in accordance with the notes to the table and these are set out below.
The VAT Rate Tables set out the VAT to be charged if you account for VAT on an annual, quarterly or monthly basis.
1. Valuation table
Description of vehicle: vehicle’s CO2 emissions figure
VAT inclusive consideration for a 12 month prescribed accounting period (£)
VAT inclusive consideration for a 3 month prescribed accounting period (£)
VAT inclusive consideration for a 1 month prescribed accounting period (£)
120 or less
225 or more
Where the CO2 emission figure is not a multiple of five, the figure is rounded down to the next multiple of five to determine the level of the charge.
For a bi-fuel vehicle which has two CO2 emissions figures, the lower of the two figures should be used.
For cars which are too old to have a CO2 emissions figure, you should identify the CO2 band based on engine size, as follows:
If its cylinder capacity is 1,400cc or less, use CO2 band 140
If its cylinder capacity exceeds 1,400cc but does not exceed 2,000cc, use CO2 band 175
If its cylinder capacity exceeds 2,000cc, use CO2 band 225 or more
Please see the notes to the Valuation Table for more details.
Notes to the Valuation Table
For a car of a description in the first column of the valuation table, the value on the flat-rate basis of all supplies of road fuel made to any one individual in respect of that car for a prescribed accounting period is the amount specified under whichever of the second, third or fourth columns corresponds with the length of the prescribed accounting period.
Where a CO2 emissions figure is specified in relation to a car in a UK approval certificate or in a certificate of conformity issued by a manufacturer in another member state corresponding to a UK approval certificate (“corresponding certificate of conformity”), the car’s CO2 emissions figure for the purposes of the valuation table is determined as follows:
if only one figure is specified in the certificate, that figure is the car’s CO2 emissions figure for those purposes
if more than one figure is specified in the certificate, the figure specified as the CO2 (combined) emissions figure is the car’s CO2 emissions figure for those purposes
if separate CO2 emissions figures are specified for different fuels, the lowest figure specified, or, in a case within sub-paragraph (b), the lowest CO2 (combined) emissions figure specified is the car’s CO2 emissions figure for those purposes
For the purpose of paragraph 2, if the car’s CO2 emissions figure is not a multiple of 5 it is rounded down to the nearest multiple of 5 for those purposes.
Where no UK approval certificate or corresponding certificate of conformity is issued in relation to a car, or where a certificate is issued but no emissions figure is specified in it, the car’s CO2 emissions figure for the purposes of the valuation table is:
140 if its cylinder capacity is 1,400 cubic centimetres or less
175 if its cylinder capacity exceeds 1,400 cubic centimetres but does not exceed 2,000 cubic centimetres
225 or more if its cylinder capacity exceeds 2,000 cubic centimetres
For the purpose of paragraph 4, the car’s cylinder capacity is the capacity of its engine as calculated for the purposes of the Vehicle Excise and Registration Act 1994.
In any case where:
in a prescribed accounting period, there are supplies of fuel for private use to an individual in respect of one car for a part of the period and in respect of another car for another part of the period
at the end of that period one of those cars neither belongs to, nor is allocated to, the individual, the flat-rate value of the supplies is determined as if the supplies made to the individual during those parts of the period were in respect of only one car
Where paragraph 6 applies, the value of the supplies is to be determined as follows:
if each of the 2 or more cars falls within the same description of car specified in the valuation table, the value specified in the valuation table for that description of car applies for the whole of the prescribed accounting period
if one of those cars falls within a description of car specified in that table which is different from the others, the value of the supplies is the aggregate of the relevant fractions of the consideration appropriate for each description of car in the valuation table “The relevant fraction” in relation to any car is that which the part of the prescribed accounting period in which fuel was supplied for private use in respect of the car bears to the whole of that period.
“CO2 emissions figure” means a CO2 emissions figure expressed in grams per kilometre driven.
“UK approval certificate” means a certificate issued under either:
Section 58(1) or (4) of the Road Traffic Act 1988
Article 31A(4) or (5) of the Road Traffic (Northern Ireland) Order 1981
The UK will be leaving the EU on 29 March 2019. Leaving the EU with a deal remains the Government’s top priority, however the government and businesses should continue to plan for every possible outcome including no deal.
In December, HMRC wrote to VAT-registered businesses that trade only with the EU advising them to take 3 actions to prepare for a no deal EU Exit, including registering for an UK Economic Operator Registration and Identification (EORI) number. You can read the full letter here.
Businesses that only trade with the EU will need an EORI number:
to continue to import or export goods with the EU after 29 March 2019, if the UK leaves the EU without a deal; and
before they can apply for authorisations that will make customs processes easier.
If you are a UK business that trades with the EU and do not already have an EORI number then you should register for an EORI number at GOV.UK now. It only takes 10 minutes to apply. These businesses should also decide if they want to hire an agent to make import and/or export declarations for them or make the declarations themselves.