Welcome to the first of a regular series of blogs in which I will answer your questions about Making Tax Digital (MTD).
Before launching into this month’s questions here’s an overview of recently announced important changes.
- The mandate for self-employed and unincorporated landlords to join (on-board) MTD and file regular updates for income tax purposes from April 2018 has been pushed back.
- VAT registered entities with turnover above the mandatory £85,000 VAT registration threshold will be required to on-board from April 2019.
- The VAT registered will only be required to maintain digital records to support their VAT return submissions.
- Returns will need to be filed using MTD compliant software.
VAT – reporting requirements
The simple answer is “no.” If an entity only sells or otherwise supplies goods or services that are exempt from VAT it cannot register for VAT.
Therefore, as things stand exempt clients are not required to file VAT returns.
This position will not change in April 2019. This is when VAT registered entities with turnover above the mandatory £85,000 (2017/18) VAT registration threshold will be required to on-board for VAT reporting purposes.
The period covered by the new MTD VAT returns will be the same as the period covered by an entity’s current return, therefore, most businesses will be required to file quarterly MTD-compliant returns.
In addition there will be a requirement for all VAT related transactions to be recorded .
I should add, if VAT registered businesses, with turnover below the compulsory registration threshold wish to voluntarily start filing their VAT returns under MTD from April 2019 or earlier, HMRC would be happy to accept them once they complied with any enrolment procedure that might be put in place.
Care should be taken to differentiate between the filing of MTD-compliant VAT returns and the filing of “updates”. The latter can best be described as reports containing details of an entity’s income and expenditure for a period of activity that cannot exceed three months, but could be shorter.
Updates will only need to be filed once an entity has joined the full MTD regime, not just the VAT reporting element. While unincorporated businesses, including landlords, can voluntarily on-board early, currently there is no intention to introduce any element of compulsion until April 2020 at the earliest.
HMRC has always been clear that they would only provide software if the industry fails to provide robust MTD-compliant software accountancy and bookkeeping products.
The UK is already well served by many great accountancy and bookkeeping products that not only meet, but exceed the requirements of their users. I am confident that several software companies have affordable MTD-compliant software solutions at an advanced stage of readiness.
You could be forgiven for asking, “what has happened to the free software we were all promised?”
Before the mid-summer announcements, some software companies, including at least one major player, were preparing to announce free entry-level MTD-compliant software. However, with the changes to the roll-out timetable it would seem they have postponed their announcements until it becomes clearer when the sub-£85,000 turnover businesses will be mandated to file quarterly non-VAT updates.
HMRC has always been very careful not to prefer one software company to another and the organisation has no plans to change this position, therefore, they will not be promoting a group of “preferred suppliers”.
However, the department is likely to publish and maintain a list of software providers whose products meet the strict MTD compliance criteria.
The digitally excluded
“Some taxpayers may be digitally excluded…through no fault of their own due to poor internet connection….how will HMRC handle this?” and “How will people who are unable to use a computer be supported?”
HMRC are aware of and sympathetic to both types of digital exclusion. Indeed, a number of respondents to the HMRC’s 2016 Making Tax Digital consultations highlighted the practical difficulties that people face accessing digital services.
HMRC is still considering the position of smaller businesses but has already decided that charities (though not trading subsidiaries of charities) and “the digitally excluded” will be exempt.
In their published response, HMRC said:
“The government will legislate for an exemption to MTDfB [Making Tax Digital for business] for taxpayers who cannot engage digitally.
This exemption will be based on the existing VAT online filing exemption and will therefore exempt the following groups from the MTDfB requirements, where HMRC is satisfied that they qualify:
- a person who is a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications; and
- persons for whom MTDfB is not reasonably practicable for reasons of disability, age, remoteness of location, or any other reason.”
If you have other questions about what MTD will mean to you as an agent or your clients, leave your questions in the comments below.
Brian Palmer is the tax policy adviser for AAT.