Analysis: VAT at the vanguard of Making Tax Digital

Please see the new blog date 30 October which can be found here.

The recent announcements around Making Tax Digital (MTD) place VAT firmly at the vanguard of the programme. The CIOT takes a closer look at the challenges faced by businesses, advisers and HMRC.

Under the new MTD timetable only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes from 2019, and businesses will not be required to keep digital records or update HMRC quarterly, for other taxes until at least 2020.

In line with the original MTD proposals, the headline challenges for many businesses involve the transition to digital record keeping, and quarterly reporting from that digital system. Both could be significantly different from current VAT record keeping and quarterly reporting (ie VAT return) requirements. It is an oversimplification to say that businesses currently quarterly report for VAT, and therefore will be able to do so for MTD. Critically, businesses will no longer be able to keep manual records, for example. Further, the use of spreadsheets in VAT accounting is commonplace; not only to maintain the underlying records, but typically to convert the output from accounting software into figures for the VAT return, and those spreadsheets will in future need to be able to interact with software in order to meet the requirements of MTD. Overcoming these issues should not be underestimated.

Another challenge revolves around timing. MTD for VAT will take place at around the same time as the UK leaves the European Union, applying to VAT return periods commencing on or after 1 April 2019. Yes, this is the same as the original proposals, but these were announced before the EU referendum. Uncertainty around the VAT treatment of transactions between the UK and EU will inevitably arise, and businesses will need to both understand the tax-technical changes to the rules, and ensure that their accounting systems deal with such transactions correctly.

The CIOT has produced a chart which compares the current position with the expected position under MTD for VAT in detail, see link here.

While 99 per cent of VAT returns are filed online, only around 12 per cent of VAT returns are filed via software. For the remaining 87 per cent, the VAT return figures are (presumably) manually entered into the HMRC government gateway page and submitted to HMRC, which requires manual input/ intervention. Under MTD the proposal is for VAT returns to be filed directly through software, and not be input manually.

In particular, most businesses will make adjustments to the basic accounting information before filing a VAT return (partial exemption, fuel scale charge, corrections etc). So the requirement to submit through software creates a challenge which the vast majority of businesses and software developers are yet to overcome.  The scope of the level of adjustments, and the precise mechanics, need to be carefully considered.

There are a number of other special schemes within VAT, such as Annual Accounting (AA), the Flat Rate Scheme (FRS), margin schemes and retail schemes, each of which have their own record-keeping and reporting nuances. These schemes will be accommodated under MTD, so do not provide a ‘get out of jail free’ card. The Office of Tax Simplification is undertaking a review of VAT, and areas within the review such as partial exemption and special accounting schemes could have an impact on MTD for VAT, although pressures on Parliamentary time are likely in the short term to limit the amount of simplification measures we see.

Looking a little broader, only VAT appears to be within the scope of MTD, so other taxes (Insurance Premium Tax, Machine Games Duty etc) will continue as at present, as will the current method of reporting statistical VAT information (Intrastat, EC Sales Lists etc). Businesses may therefore have to cope with two types of accounting records / reporting, or digitise for these other taxes, too.

Wider still, overseas businesses that are VAT registered in the UK will also need to comply with the requirements of MTD, which could throw up challenges, particularly considering the fact that the overseas business might not be using MTD-compatible software.

Be sure to see our chart here for a fuller analysis of MTD for VAT. We will aim to keep this updated as matters progress.

Blog by Richard Wild, Head of Technical, Chartered Institute of Taxation