Making Tax Digital (MTD) is not just another slogan. We are about to experience the biggest change in UK tax since the introduction of self-assessment in the 1990s.
April 2019 signals a new regime for VAT reporting. At that point, all VAT-registered businesses with a turnover that exceeds the VAT threshold of £85,000 will be required to keep digital records and submit VAT returns only using MTD-compatible digital systems. All other business taxes will eventually form part of Making Tax Digital, but not until April 2020 at the earliest. Maintaining paper records and manual online entry will cease to meet the legal requirements in tax legislation.
As an IFS user, the changes will affect you. The first wave of changes for VAT comes in on 1st April 2019 – now is the time for you to get the proverbial ducks arranged in order.
Why is this change happening?
HMRC estimates it’s missing £9.4 billion in tax revenues due to errors and ‘failure to take reasonable care’ in submissions. By digitising returns via MTD, it hopes to close this element of the tax gap.
It is rumoured that the new HMRC system is costing the government £1.3bn to become the most digitally advanced tax administration in the world by 2020. As with any business, they will be looking to re-coup this investment so it should come as no surprise that there will be penalties for the non-compliant.
What are the changes?
From April 2019, if your business falls within the VAT threshold, you will need to:
- Keep your records digitally
- Provide your VAT return information to HMRC through a digital link using MTD-compatible software. Submitting VAT returns using HMRC’s own VAT online services (currently accessed by logging on to HMRC’s site) will no longer be possible.
You will need to submit a digital record of;
- Your business name
- The address of your principal place of business
- Your VAT registration number
- Any VAT accounting schemes that you use
Furthermore, for each supply you make, you must record the:
- Time of supply (tax point)
- Value of the supply (net value excluding VAT)
- Rate of VAT charged
This only includes supplies recorded as part of your VAT Return. Supplies that do not go on the VAT Return do not need to be recorded in functional compatible software. For example, intra-group supplies for a VAT group are not covered by these rules.
Where more than one supply is recorded on an invoice and those supplies are within the same VAT period and are charged at the same rate of VAT, you can record these as a single entry.
Let’s consider the new legislation, piece by piece:
What is meant by a ‘Digital Link’?
HMRC define digital links as: “Data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create the digital journey.”
What is meant by ‘functional compatible software’?
This is defined by HMRC as: “a software program or set of software programs, products or applications’ the function of which include: recording and preserving digital records; providing to HMRC information and returns from data held in those digital records using the API platform; and receiving information from HMRC using the API platform.”
HMRC has indicated that there will be a ‘soft landing’ in place between April 2019 and April 2020. During this time, they say there will be no financial penalties for record keeping failures, nor will there be a mandatory requirement for there to be a digital link between the accounting software and the API-enabled software (this is mandatory from April 2020). However, from April 2019 all VAT returns must be automated, and can not be manually keyed. This is not part of the ‘soft landing’, it is mandatory.
A worrying lack of awareness
Despite the magnitude of this change, there is a worrying lack of awareness. Little information from HMRC is directly targeted to businesses. A British Chambers of Commerce survey, which gathered responses from 1,100 businesses, found a “widespread lack of awareness among business communities about the switch to a new digitised system.” The survey found that 24% of firms had no knowledge of MTD whatsoever, while a further 66% either had only basic knowledge of it, or knew it just by name. Even among businesses aware of the scheme, very few are preparing for it. According to the report, just one in four of those firms who know “a lot of details” about MTD have made plans for its implementation.
What does this mean for you as an IFS customer? In short, you need to act now!
MTD may mean changes to the way your business records VAT and will require changes to the way you communicate VAT information to HMRC. These changes will inevitably mean new processes, procedures and most likely, new IFS compatible software in order to be compliant.
HMRC will not be helping businesses with new software, however it is working with suppliers to develop suitable solutions in advance of April 2019. Businesses affected within the scope will need to acquire a suitable commercial software product or appoint an agent to submit returns to HMRC on their behalf. Cooper Software, using our expert resources and knowledge, are developing a robust solution that effectively meets all the requirements for IFS customers.
As an IFS customer you will need to have a firm understanding of your current processes and being able to develop a clear road map to becoming MTD compliant will be critical in ensuring you minimise the cost and disruption to your business.
There are many ways in which Cooper Software can help you get ready to meet the initial requirements by April 2019. Download our Guide to Making Tax Digital. This is essential reading for IFS customers as it explains the changes in more detail and gives answers to some of the key questions you are likely to have.
We are also planning a series of webinars where we will discuss the changes in more detail and how they impact you as an IFS customer, as well as letting you hear more about our Making Tax Digital solution which is currently in development. More details will be available soon.