From 1 April 2019, HMRC is changing the way certain businesses submit their VAT returns and the new process will also extend to the keeping of digital VAT records.
What is Making Tax Digital?
Making Tax Digital (MTD) is a new system intended to make it easier for businesses to get their tax right first time. In turn it is anticipated that this will reduce the costs, risk of errors and the worry that businesses face when HMRC has to intervene to put things right. Although the MTD system has been proposed for Income Tax Self-Assessment (ITSA), Value Added Tax (VAT) and Corporation Tax (CT), it is only VAT that will be subject to the system from 1 April 2019.
Will charities be affected by Making Tax Digital?
Yes, any business with taxable supplies exceeding the current VAT registration threshold of £85,000 in the 12 months preceding 1 April 2019 will be subject to using the new system. There is no exemption for charities, so MTD will be compulsory if your charity fits these criteria. However, HMRC has deferred mandation by six months to 1 October 2019 for a small minority of VAT-registered businesses with more complex requirements. These include: trusts, unincorporated not for profit organisations, businesses making payments on account, VAT groups and VAT divisions.
With a few exceptions also, MTD is now open to sole traders and companies (unless they are part of a VAT group or VAT division) provided that they are up to date with their VAT.
If your VAT registration is voluntary, ie your annual taxable turnover in the 12 months up to 1 April 2019 is below £85,000, then you can continue to submit your VAT returns through the HMRC portal for now or you can choose to use the MTD system. It is worth noting that MTD will become compulsory for all VAT registered entities in due course.
What is going to change?
From 1 April 2019, paper records will no longer be sufficient and it will become mandatory for businesses including charities, which fall within MTD to keep digital records and to submit VAT returns directly from accounting software. Information can only be submitted to HMRC via an Application Programme Interface (API) which can be done from software, bridging software or API enabled spreadsheets. You will no longer be able to submit your return through the government gateway.
To meet MTD requirements, there is no need to have a complete set of digital records all in one piece of software. If there is a digital link between the pieces of software, records can be kept in a range of compatible digital formats. It is expected that the reporting obligations will change after Brexit.
What will not change?
Businesses will not need to adjust their VAT reporting dates and will not be required to provide any more VAT information than they do already. The nine boxes on the VAT return are not expected to change. There will, however, be scope for businesses to provide voluntary VAT updates and supplementary data outside of the VAT return but these features will be available at a future date.
The current exemptions for electronic submissions will also apply to MTD, e.g. on the grounds of a taxpayer’s religious beliefs, practical inability to use a functional compatible software system or when subject to insolvency procedures.
If you usually authorise an agent to submit your VAT return for you, this can still continue however you will need to allow the agent to have access to your MTD compatible software that holds your mandatory records.
Do partial exemption and other adjustments have to be made digitally?
One very important concession which is relevant to charities is that only the total for each type of adjustment will be required to be kept digitally, not details of the calculations underlying them. If the adjustment requires a calculation, the calculation itself does not have to be made in the software. For example, partial exemption calculations and permitted input tax and output tax adjustments can be carried out on a spreadsheet and the information transferred in manually – this step is not part of the MTD journey. The spreadsheet containing digital records may then be emailed to your tax agent to import the data into their software to undertake the calculation.
Will there be penalties if we are not ready on 1 April 2019?
HMRC are aware that the upcoming changes are challenging to businesses and they are proposing a soft-landing period of at least 12 months, with no record keeping penalties. This should allow businesses time to update their systems. During that soft landing period, it will be acceptable for data to be transferred between software and spreadsheets manually, although the final submission will have to be made to HMRC using API enabled software.
How can we prepare for Making Tax Digital?
HMRC has confirmed that they are not developing their own MTD compatible VAT software. However, there will be a hub on their website for software developers who offer MTD compliant software.
If you currently use accounting software, you will need to contact your software provider as it will need to be upgraded. If you currently use only spreadsheets and submit your VAT return through the HMRC Gateway, you can contact us or your own agent to discuss the software options available to you.
If you currently maintain records on paper, your processes will need to change. You will need to either engage an accountant to do the bookkeeping and quarterly reporting or acquire and use the appropriate software.
Regardless of whether you’re impacted from 1 April 2019 or later, we would encourage you to take advice as soon as possible.
This post was written by Price Bailey Charities Partner, Helena Wilkinson. If you need further information on any of the above please feel free to get in touch with Helena using the contact form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.