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Making Tax Digital for VAT is here

Mar 08, 2019

On 1 April 2019, Making Tax Digital (MTD) is being introduced in the UK with the aim of transforming and modernising how tax is reported and managed. The first stage of MTD is to bring VAT into the digital domain. Jennifer Upton and Senan Kavanagh explain the steps businesses need to take to prepare themselves.

For VAT periods commencing on or after 1 April 2019, all VAT registered businesses with a turnover in excess of the VAT registration threshold (taxable supplies of £85,000 per annum) are required to maintain digital records for VAT and submit their VAT returns digitally. Certain businesses are able to avail of a six-month deferral whereby MTD for VAT is not mandated until 1 October 2019.

MTD Requirements

There are three principal requirements in relation to MTD for VAT:

Digital records (effective 1 April 2019)

Details of the business transactions that directly lead to the creation of the summarised VAT return figures due for periodic submission to HMRC must be maintained in digital form within ‘functional compatible software’.

Digital links (effective 1 April 2019 with a soft landing up to 1 April 2020)

It will be necessary to demonstrate that ‘digital links’ are used throughout the end-to-end VAT return preparation process to transmit data between systems used to produce data relevant to the VAT return. Re-keying data and the use of ‘cut and paste’ are specifically prohibited, which will require information flows between systems to be automated. While this requirement has the force of law from 1 April 2019, HMRC has confirmed that a ‘soft landing’ period will apply, whereby penalties will not be imposed for non-compliance prior to 1 April 2020 (or 1 October 2020 where the deferral applies). It should be noted that the soft landing only applies in respect of the digital links requirement.

Digital submission of VAT returns (effective 1 April 2019)

For VAT returns filed in respect of periods commencing on or after 1 April 2019, VAT return information can only be submitted to HMRC via an application programme interface (API). It will no longer be permitted to manually complete the nine box UK VAT return via HMRC’s portal. HMRC have issued a list of approved software packages that will support this requirement.

Deferral

A six-month deferral is available for certain categories of taxpayers, including public bodies, members of VAT groups and foreign, non-established businesses with a UK VAT-registration.

Businesses in scope of the deferral have to receive a specific direction from HMRC in order for the deferral to apply. We understand that HMRC has now written to all taxpayers that they believe to be in this category. Where the deferral applies, the requirements – in respect of digital records and the digital submission – will apply from 1 October 2019, while the requirement to maintain digital links will not apply until October 2020.

Other taxes

MTD is expected to be extended to income tax and corporation tax in the near future. An exact timeline for implementation has not yet been confirmed, however, HMRC have stated that it will not be before April 2020. It is expected that MTD for income tax and corporation tax will require periodic disclosure of income, expenditure and profit data, which would not currently be disclosed until annual tax returns are filed.

Next steps

Businesses should assess the impact of MTD on their UK VAT reporting process to ensure that they are compliant. This should include:

  • Verifying that there is the capability in place to submit VAT returns digitally via an API for VAT return periods commencing on or after 1 April 2019, or 1 October 2019 (where applicable).
  • Reviewing existing records to confirm that they meet the MTD digital recordkeeping requirements and are retained in functional compatible software.
  • Reviewing the existing end-to-end process to ensure it is efficient and accurate.
  • Putting a plan in place to ensure that the journey of information, from source to VAT return, will be compliant prior to the end of the soft landing period 1 April 2020 or 1 October 2020 (where applicable).
  • Where the deferral applies, ensuring that correspondence has been received from HMRC to this effect.

Jennifer Upton is a Director in KPMG’s Belfast VAT team. Senan Kavanagh is an Associate Director in KPMG’s Tax Technology team.