By Alex Fish, personal tax manager
020 7490 7766
HMRC has previously confirmed that MTD for VAT will commence with effect from April 2019.
On 18 December 2017, HMRC published a raft of documents in relation to MTD (Making Tax Digital) for VAT. This draft legislation and further guidance confirms the following, together with explanatory notes for the above items.
- Who is in scope & VAT consultations – VAT threshold & penalty regime
- What digital record keeping is required – ‘functional compatible software’
- How additional information can and should be submitted – using an Application Programme Interface or API
Who is in scope and VAT consultations
The legislation introduced states that business with ‘taxable’ turnover above the VAT registration threshold, currently £85,000, are within the scope of the MTD for VAT. To clarify, taxable turnover is your business income, excluding any exempt or outside the scope supplies that you make. This will include supplies that would be standard, reduced or zero-rated if your business was registered for VAT.
There is currently a consultation on changing the VAT registration threshold. At the Autumn Statement, the government confirmed that it was not considering a reduction to the VAT threshold as has been previously mooted so for now, the registration threshold remains at £85,000.
The consultation is instead looking at changing the 12-month reference period for measuring the turnover, to an average of the previous two years. Together with other measures, this is designed to encourage businesses not to restrict their turnover to under the threshold and in turn, to avoid a ‘cliff-edge’ impact by exceeding the threshold. All of this is with the ultimate aim of stimulating growth of small businesses.
If measures are introduced in line with the government’s aims and these are successful
in stimulating growth, there will likely be an increase to the number of businesses within the scope of MTD for VAT and in turn, that creates additional compliance issues which may not have been anticipated by those businesses.
With additional submissions comes the possibility of increased penalties for non-compliance and HMRC ran separate consultations on new payment regimes last year.
The outcome of these was that a points-based regime was preferred and draft legislation is expected later this year with the anticipation that these will apply for VAT in 2020 i.e. once the MTD for VAT regime has already been running for a year.
What digital record keeping is required & how additional information can and should be submitted
We now know that ‘functional compatible software’ is one or more programmes which can record and preserve electronic records, interact with the API to provide information and returns to HMRC and receive information back from HMRC. It seems pretty clear that HMRC will not be providing this.
The accounting and tax institutions have been in continuous conversation with HMRC regarding the requirements and the practical impacts for businesses. As a result, HMRC has made some concessions specifically in terms of record keeping requirements, which are now largely similar to the existing requirements.
There has also been a relaxation to the extent of the digital links between spreadsheets
and various software for certain businesses, such as those who are partially exempt. This, whilst the most practicable from the outset, is likely to be a short-term concession for the first year as HMRC and the software providers adapt their systems.
VAT Pilot Scheme
In addition to the above, HMRC has announced that a VAT pilot scheme will test the system with selected participators in anticipation of the mandatory start date of April 2019. Lubbock Fine has applied to HMRC to enter the pilot scheme. We believe that both our clients and the firm will benefit by keeping up-to-date with developments and possibly by allowing us to influence the design and functionality of the system. No clients will be signed up to the pilot without their prior approval.
HMRC’s original proposals were that from April 2020, all businesses, including property rental businesses and regardless of turnover, would be required to keep their records in a digital format and submit quarterly filings to HMRC for income tax and corporation tax purposes.
This has now been postponed indefinitely as HMRC have stated that this will not happen until the VAT system has first been shown to work well however in the interim, HMRC are pressing ahead with the MTD for income tax pilot scheme albeit on a very small scale.
At the moment this is only available to a select few software providers and not available to Lubbock Fine however we will be looking into joining the pilot scheme as and when this is available to us.
If you are not yet using a software package to maintain your accounting records we highly recommend you start doing so this year in preparation for the year ahead. For further information, please contact Alex Fish email@example.com in our tax
department or James Gilliand firstname.lastname@example.org in our outsourcing team,
020 7490 7766.