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Making Tax Digital for VAT: an update

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The issue of VAT is currently at the fore of the government’s Making Tax Digital (MTD) initiative. Here we provide an overview of the latest position.

What’s changed?

MTD was previously set to be implemented between 2018 and 2020. However, in response to concerns raised by experts over the pace and scale of the changes, the government has now deferred the introduction of MTD for Business (MTDfB) by a year.

From 1 April 2019 only businesses with turnover above the VAT threshold (currently £85,000) will have to keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.

The government has confirmed that keeping digital records and making quarterly updates will not be made mandatory for taxes other than VAT before April 2020. Those businesses below the VAT threshold which have voluntarily registered for VAT can opt to join MTDfB. HMRC will be piloting MTD for VAT for the rest of 2017, with wider live piloting beginning in Spring 2018.

MTD for VAT: an overview

Following the publication of the Finance Bill in September 2017, which includes primary legislation allowing the introduction of MTD for VAT and income tax, HMRC published an open consultation on the draft VAT regulations. The law will retain the current rules regarding keeping and preserving records, the keeping of accounts and the making of returns, but it provides new powers to allow HMRC to introduce regulations governing the digital submission of information from VAT-registered businesses.

Keeping digital records

Under the proposed rules, businesses will be required to submit summary totals of their digital records to HMRC at least every three months. In addition, with their first quarterly update they must provide certain ‘designatory data’, and any subsequent changes to this data must be included in their next quarterly update. The regulations will specify the information a business needs to preserve digitally.

Businesses will also need to maintain digital records for the VAT account (the audit trail between primary accounting records and the VAT return). This will include details of the output and input VAT.

The VAT account will need to detail any adjustments made which will include correcting errors in calculating VAT payable in a previous period, and other adjustments such as claiming bad debt relief and annual adjustments for partial exemption and retail schemes. Only the total for each type of adjustment will be required to be kept digitally and not details of the calculations underlying them. Businesses will need to preserve digital records using functional compatible software for up to six years.

VAT returns

For businesses within the scope of MTD for VAT, information will be pulled from the digital records to populate the VAT return. There will be a minimum of nine boxes required to complete the return, although HMRC will permit businesses to include supplementary VAT information as part of a VAT return or voluntary update.

The government has confirmed that the submission deadlines for income tax and VAT will not be aligned, meaning there will be no changes to the statutory VAT return or payment dates.

As your accountants, we will keep abreast of the latest announcements relating to MTD. For more information, please contact us.