Lee Sharpe looks at the latest developments in respect of making tax digital.
We are now officially into the dawn of a new tax age: making tax digital (MTD) for VAT. So far, only businesses whose VATable turnover, in a period of up to 12 months, exceeds the annual VAT threshold actually need to apply MTD for VAT (VATA 1994, Sch 11, para 6(7); introduced by F(No 2)A 2017, s 62).
However, note that once a business is ‘caught’ within the MTD regime, it does not automatically drop back out of MTD for VAT again if its turnover falls back below the threshold at some point in the future.
VATable turnover of £85,000 or more in the 12 months up to 31 March 2019 means that the business satisfies the criteria for MTD for VAT from April 2019 onwards.
Rolling start date
A particular business’ start date for MTD for VAT will depend on the stagger group – the quarter-end date:
- If the quarter-end is 31 March 2019, MTD compliance starts from 1 April 2019 (this start date applies also to those businesses that file on a monthly basis).
- If the quarter-end is 30 April 2019, MTD compliance starts from 1 May 2019.
- If the quarter-end is 31 May 2019, MTD compliance starts from 1 June 2019.
There are a small number of businesses whose affairs are deemed more complex, and do not have to start until 1 October 2019; they should know who they are, because HMRC is supposed to have written directly to each business.
MTD for VAT
This requires:
Digital record-keeping; and
Filing VAT returns using approved ‘functional compatible software’.
Note that businesses within MTD for VAT will no longer be able to file their VAT returns online using the ‘normal’ online filing facility. The ‘old’ online filing portal is being kept for businesses that are not caught by MTD For VAT (such as those with low turnovers that have registered voluntarily).
Digital record keeping
MTD for VAT requires that digital records be kept for every transaction relevant to the business’ VAT return.
According to their latest guidance, for supplies made by the business, this includes:
- Time of supply;
- Value of supply (net value excluding VAT);
- Rate of VAT charged.
A business can, however, aggregate several supplies made on a single invoice at the same time (period) and at the same rate of VAT (where there are different rates of VAT on a single invoice, they have to be separated out per rate).
For supplies made to a business within MTD for VAT, records that must be kept digitally include:
- Time of supply;
- Value of supply - including any VAT that the business cannot claim;
- Amount of input VAT claimed.
If there is more than one supply on an invoice received, the business can record the details from the invoice in one record.
Use of third parties and agents
Where a third party provides a single invoice for multiple supplies on behalf of the business, all supplies may be treated as a single invoice, and subject to the above treatments (a similar approach may be adopted for agents that receive supplies on behalf of the business).
Example 1: Letting agent
A business uses a letting agent to rent out a number of properties. Each month, the letting agent provides a summary of the rents collected and VAT charged.
The business can treat all supplies covered in this summary document as if they were covered by a single sales invoice, rather than treating each invoice issued on their behalf separately.
The business can group transactions together, provided they are within the same VAT period and are charged at the same rate of VAT.
Example 2: Employee expenses
If a business reclaims VAT on relevant employee expenses and employees provide summary details combining several purchases, each purchase does not have to be recorded separately. The business can instead record the total value and the total input VAT due.
Digital summary data
The business will also have to keep digital summary data in support of each VAT return submitted under MTD for VAT:
- Total output VAT owed on supplies made;
- Total output VAT owed (if any) on acquisitions from other EU member states;
- Total VAT required on behalf of a supplier under a reverse charge procedure (and note that the new VAT reverse charge for construction services starts in October 2019);
- Total input VAT being claimed;
- Total input VAT on acquisitions from other EU member states;
- Total VAT that needs to be paid or reclaimed following a correction or error adjustment; and
- Any other adjustment allowed or required by VAT rules.
Certain other standing data must be kept in the new approved software, such as business name and address, and VAT registration number.
VAT adjustment calculations and error correction
These do not have to be kept digitally because it would be practically impossible to accommodate all the various calculations required.
More precisely, while the adjustment amount itself has to be recorded digitally, (as noted per summary data above), the underlying calculations do not.
Joining MTD for VAT – don’t be hasty!
Businesses have to sign up to MTD for VAT at least a week before the first MTD VAT return is due, at:
Businesses should not, however, sign up until the last VAT return has been filed under the ‘old’ system – and if the business pays its VAT by direct debit, it should give at least a further six working days’ grace to ensure that the corresponding final payment under the ‘old’ regime has been processed properly before the transition to MTD for VAT; otherwise, there is a risk that payments will be misallocated.
‘Soft landing period’ for penalties
MTD was supposed to be the start date for a new penalty regime for VAT returns, etc., intended as part of a project broadly to harmonise penalty regimes across the taxes. The proposed new regime will orient around a points system, with penalties being triggered only for more serious/repeated failures.
This has now been delayed and it seems likely that the new penalty regime will not be introduced until 2020/21 at the earliest.
Meanwhile, there is a ‘soft landing period’ for MTD for VAT, lasting the first year of its introduction.
Strictly, the official ‘soft landing period’ covers only the digital links between software packages; initially, it will be permissible for people simply to ‘cut and paste’ amounts from one software package to another, but after the soft landing period those links must update automatically; human intervention will effectively become an offence.
More broadly, HMRC has said that it will operate a ‘light touch’ penalty approach in the introductory phase of MTD for VAT, meaning that MTD failures are not expected to be penalised automatically, provided that the business can demonstrate that a reasonable attempt has been made to comply with the new regime, in relation to the new record-keeping and filing obligations.
Conclusion
Most landlord businesses will not have to concern themselves with MTD for VAT because the supply of land is, in most cases, exempt by default; many landlords could not register for VAT even if they wanted to.
Other landlords may operate VATable B&B-type businesses or have opted to tax their commercial property lettings, but MTD for VAT will be necessary only where the level of VATable supplies in a year means that VAT registration is itself mandatory.
Those for whom VAT is optional do not have to apply MTD for VAT and can continue to file using the existing facilities, if they prefer.
For those landlords who do (or must) engage with MTD for VAT, it is important to ensure that the business transition takes place at the right time, as set out above, and to note that HMRC’s promised ‘light touch’ and ‘soft landing’ approaches apply only where a business has difficulties in adopting MTD; struggling with MTD is unlikely to provide an acceptable excuse for failing to pay VAT on time.
As always, it is strongly recommended that businesses engage with their professional advisers to ensure that MTD is managed appropriately.
