Cometh the VAT storm?

Mar 25, 2019

Making Tax Digital (“MTD”) and Brexit are coming. Whilst many VAT and other tax and customs changes as a result of Brexit remain unknown at the time of writing, what you can be certain of is that Brexit and MTD for VAT could cause a collision of change for many businesses from next month. But what do we know about these important changes? Read on.

MTD for VAT comes into effect on 1 April 2019 and applies to any VAT-registered business with a turnover exceeding the current VAT registration threshold of £85,000 and which has not received confirmation from HMRC that MTD for VAT is deferred to 1 October 2019. MTD applies to the first VAT return period commencing on or after commencement.

 At the heart of the regulations are two core requirements:- 

  • Digital record keeping – businesses will be required to keep and preserve digital records; and
  • Electronic filing of VAT returns – to submit a VAT return, businesses must use information stored in their digital records combined with “functional compatible software” to submit VAT returns directly to (and receive responses from) HMRC.

HMRC have recently announced more details of the soft landing for MTD for VAT. During the “soft landing” period only (i.e. the first year from either 1 April 2019 or 1 October 2019), where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods. Cut and paste will not be acceptable after this period has elapsed. VAT Notice 700/22: Making Tax Digital for VAT sets out this and the “soft landing” in more detail. 

At the Spring Statement it was also confirmed that MTD will not be made mandatory for any other taxes or businesses in 2020. The government also confirmed that there will be a “light touch” approach to penalties in the first year of implementation of MTD. Where businesses are “doing their best to comply, no filing or record keeping penalties will be issued”. This soft landing does not apply to late payment penalties (default surcharge) which are unchanged. HMRC are also warning that signing up for MTD for VAT takes at least seven days.

In the area of Brexit, HMRC have published revised guidance, which will apply in the event of a no-deal Brexit, for the future treatment of payments between associated companies in the UK and other Member States. These are currently exempt from deduction of tax under the EU Interest and Royalties Directive. The revised guidance appears to confirm that, at least initially, domestic legislation will continue to apply for payments from UK companies to EU associates for interest and royalties..

In the event of a no deal Brexit, the UK will introduce a postponed method of accounting for import VAT on goods that are imported into the UK from the EU and outside of the EU thereby alleviating a cash flow headache for many traders.

The BEIS has also published a leaflet for SMEs, outlining changes that may affect the business when the UK leaves the EU, with advice on actions to take and sources of support.

Details of the governments approach to avoiding a hard border between Northern Ireland and Ireland if the UK leaves the EU without a deal on 12 April have also been published.