UK | Final Countdown to Making Tax Digital (MTD) for VAT

With just seven months till take-off, VAT-registered businesses are fast running out of time to prepare their systems for Making Tax Digital (MTD) for VAT…

Part of HMRC’s trailblazing initiative, this regime aims to transform the current UK tax system into one of the most digitally advanced world-wide. Ultimately, all taxes will fall under this programme but VAT is leading the way and being the early adopter.

HMRC ramped up its drive to MTD for VAT last month with the release of the following guidance:

  • Finalised VAT notice for MTD, clarifying the detailed requirements of the system;
  • A stakeholder communications pack; and
  • An initial list of software developers whose products have been tested in HMRC’s test environment and the prototype of their software shown to HMRC. This will be added to by HMRC over time and there will also be a list of “approved” software in due course.

What Exactly is MTD for VAT?

Under the regime, which goes live as of 1st April 2019, businesses VAT registered in the UK and making supplies above the UK VAT registration threshold (currently £85,000) will no longer be able to maintain manual VAT records and VAT returns can no longer be entered through the HMRC portal. Impacted businesses will have to keep digital VAT records using MTD compatible software and create and submit VAT returns from those digital records directly into HMRC’s system via its Application Programming Interface (API) platform.  Both established and non-established businesses will be impacted by these changes.

Digital Record Keeping

Businesses will have to maintain specified VAT accounting records digitally.  This will have to be achieved via the use of MTD compatible software or apps, such as a digital record keeping system, or an API-enabled spreadsheet. The scope of the digital records known as the “electronic account” will be more onerous than at present and will consist of permanent data, data relating to individual transactions, and the VAT account. Examples of new information that will need to be recorded are: in relation to supplies made, different applicable VAT rates; for supplies received, the amount of input tax to be claimed.

VAT Return Submission

Instead of submitting VAT returns through the HMRC portal, businesses will have to submit the VAT return data directly from the digital records.  The information is required to pass digitally to HMRC’s systems using a digital record keeping system, an API-enabled spreadsheet, a bridging system, or a combination of these MTD compatible software programs and apps.

The transfer of data between these programmes must be accomplished though “digital links” which means without human intervention. Therefore, it will no longer be possible to manually enter or “cut and paste” data between different accounting software.  In relation to this requirement, HMRC has provided a “soft-landing” period meaning it will not generally be enforced in the first year of MTD for VAT (1st April 2019 to 31st March 2020).  The only exception to this is that a digital link must be used when the VAT return data is passed from the taxpayer’s digital records to HMRC’s API platform.

Technology is Key

Clearly, all businesses will have to invest in the correct technological processes to satisfy the MTD for VAT requirements and it is critical to start preparing now to ensure a fully compliant accounting system is in place by the 1st April 2019 deadline.

A useful first step is to evaluate the extent of the content required to be kept digitally, map where digital links might be needed and then confirm whether new software will be required or if amendments can be made to existing systems to enable submission of the returns.

At Accordance we are ready to discuss the practical implications of MTD for your business to ensure that you are fully prepared to meet these new rules.

Please do get in touch with us to see how we can help you satisfy your MTD compliance obligations.