I have been travelling the length and breadth of England delivering MTD updates to enthusiastic AAT members in places as far afield as Leeds, Exeter, Liverpool, Manchester, and London. Here is my guidance for some of the recurring questions that came up during those sessions.
“If it will become mandatory to file VAT returns in April 2019, what data will I have to submit to HMRC and how can I do this?”
Mel Stride MP, the Financial Secretary to the Treasury, confirmed in his July 2017 written Ministerial Statement that VAT registered entities with turnover above the £85,000 compulsory registration threshold will enter the MTD regime from April 2019. Those that are voluntarily VAT registered (with turnover below £85,000) will not be required to on-board in 2019.
The good news is that HMRC will not require more information than that disclosed in the current VAT return’s nine boxes.
There will be no need to supply underlying data linked to the filed return, nor will HMRC have backward access from its systems into the software filing the return.
Simply, all that will be needed is the headline data (the totals) disclosed on the face of the current VAT return using MTD-compliant software or spreadsheets.
For return periods starting after the 31 March 2019 those mandated to file MTD-compliant VAT returns will not however be able to use HMRC’s own VAT filing return product.
“What will my software need to do to be MTD-compliant?”
To be MTD-compliant, commercial software must be capable of:
1. Keeping records in a digital form
This does not mean that it must be able to store electronic copies of all sales and purchase invoices and other third-party documentation electronically. Merely, that it is capable of recording key pieces of information concerning a transaction, such as:
- Date of transaction
- The amount
- A description
2. Preserving digital records
HMRC requires that data must be capable of being held for six years.
3. Creating a VAT return using the underlying digital records
Once a VAT registered entity has on-boarded they will not be permitted to use HMRC’s own online VAT return filing product. Therefore, it is essential that a business’s chosen third-party software or the spreadsheets can link with HMRC’s back-end-systems to make a direct submission.
4. Providing HMRC with VAT data on a voluntary basis
If an on-boarded entity is selected for a compliance review it must be able to supply the preserved data to HMRC.
5. Receiving information from HMRC via the API (application programme interfaces) platform
This will allow HMRC to send ‘nudges’ or warnings to a business or its agent via the filing software to advise that something within the filed data isn’t correct. For instance, the output VAT figure reported was greater than 20% of the supplied net outputs.
“How will I know if my current software supplier is MTD compliant?”
Few software products are MTD compliant right now but HMRC is working with developers to ensure that their products will be ready well before April 2019.
In fact, it is expected that many will be able to offer their customers the ability to file MTD-compliant VAT returns from April 2018, a full year in advance of VAT mandation.
MTD is such a show-stopper that I fully expect that most software suppliers will be in regular communication with their users to keep them updated on their progress to meet the compliance requirements.
If your software supplier is not updating you, you should ask the following questions:
- Are they working with HMRC to ensure their product will be MTD-compliant?
- What MTD-functionality are they planning to deliver and by when?
At the very last you need to be reassured that their MTD-compliant VAT return filing product will be ready in advance of April 2019.
“In order to start the MTD process, would I have to register my clients with HMRC?”
Yes, all clients will have to be registered for Making Tax purposes, as will agents.
HMRC is currently beta-testing their Agent Registration Service with a handful of agents.
Once the Agent Registration Service is live it will be able to do three things:
- Subscribe to be an agent for MTD purposes
- This will entail HMRC issuing the registering agent with a new agent identification. Once issued the agent will be able to map their existing client across from their existing registration portal to the MTD platform.
- Subscribe their clients for MTD
- File quarterly updates on behalf of their clients.
Clients will also be able to register themselves if they so wish.
“What happens if I have a client that has very limited broadband connection?”
There are three specific grounds for an exemption to complying with MTD requirements:
- Living in an area of poor/no broadband coverage
- Age or disability – it should be noted that legislation is silent over what constitutes old age.
- Religious grounds.
There are over two million VAT return filers and less than 1% have claimed an exemption.
“What information will be included in the 5th return?”
The purpose of the fifth return is to ensure that the provisional figures reported using the four in-year updates are finalised for tax purposes. I envisage it will be likely that the 5th return will normally be prepared and filed by an agent after they have produced year end accounts.
Where appropriate it will take into account the usual tax and UK GAAP adjustments such as capital allowances, prepayments, accruals and stock adjustments. Although, where a taxpayer has opted to be taxed using the cash basis it is possible that only a few adjustments will be required.
As now, where a business’s turnover is below £85,000 p.a. all updates and the end-of-year return can be submitted on a three-line-accounts basis.
Essentially, think of it as being the equivalent of the self-employed schedules filed alongside a self-assessment tax return.
For more answers to your questions see our first MTD Q&A with Brian Palmer.
If you have questions about what MTD will mean to you as an agents or for your clients let us know in the comments below.
Brian Palmer is the tax policy adviser for AAT.