With a little over three months to go until the introduction of Making Tax Digital (MTD) for VAT, what do you need to do to make sure that your business is ready? By Emma Rawson, technical officer, Association of Taxation Technicians (ATT)

What is MTD?

From April 2019, businesses in MTD will have to keep digital records and use software to submit their VAT returns to HMRC. 

This will be the biggest overhaul to VAT obligations in decades - whilst 99% of VAT returns are currently filed online, only around 12% are filed directly from software.

How often you submit a VAT return and what and when you submit are not changing (for now at least) - just how you make that submission. The most significant changes for many will be the requirement to keep digital records and to file their returns with HMRC automatically from those records via software. This means no more paper records, no more entering the totals for the VAT return directly into HMRC's online portal, and no more copying and pasting. Your digital records will also need to capture more information than is currently required.

Who is affected?

The MTD requirements apply equally to all types of business - whether they are sole traders, partnerships or companies.

However, the good news is that MTD will only be mandatory for those businesses with taxable turnover above the VAT threshold (currently £85,000). For these purposes, ‘taxable turnover' includes standard, reduced and zero-rated supplies. That means that if your business is voluntarily registered for VAT you won't be in MTD and can continue with your existing procedures. You do, however, need to keep an eye on your turnover - if it goes above the threshold in future you will be caught.

Exemptions from MTD will be available for insolvent businesses, those which cannot comply on religious grounds, and the ‘digitally excluded' - those for whom the requirements are not reasonably practical because of their age, disability, remoteness of location or any other reason. Other exemptions might also apply depending upon the type or nature of your business. However, exemption isn't automatic - if you think your business might qualify for exemption you will need to contact HMRC's VAT helpline.

When is MTD being introduced?

For the vast majority of affected businesses, the MTD for VAT requirements will apply from the first VAT period starting on or after 1 April 2019.  Exactly when you come into MTD will therefore depend upon your VAT quarter - March quarter ends will be in from 1 April 2019, April quarter ends from 1 May 2019, and those with a May quarter end from 1 June 2019.

MTD has been deferred until October 2019 for a small number of businesses, including those in the VAT annual accounting scheme, ‘not for profit' organisations that are not set up as a company, trusts,
VAT divisions, VAT groups, various public sector entities, local authorities, public corporations, traders based overseas and those required to make payments on account.

MTD is being introduced for VAT first but is intended to be rolled out to other taxes in due course, with the next in line being income tax. In response to concerns raised by MPs, businesses and professional bodies such as the ATT, the introduction of MTD for income tax was delayed last year and will now not be introduced until April 2020 at the earliest.

What about software?

The biggest change under MTD is that businesses will be required to use software to keep their records and submit VAT returns to HMRC using an Application Programming Interface (API).

HMRC will not be providing free software, as they do for some other taxes, but we are starting to see some providers advertising free software to certain sectors and businesses below a certain size. Lists of MTD for VAT compliant software providers, and those providers who are developing MTD software, can be found on the GOV.UK website (search for ‘find software suppliers for sending VAT returns and Income Tax updates').

You can use spreadsheets to keep your records under MTD, but the spreadsheet must either be ‘API enabled' so that it can talk to HMRC's systems, or additional special software (‘bridging software') will be needed to lift the figures from the spreadsheet so that they can be submitted to HMRC. Simply keeping records on a spreadsheet will not be enough to meet the requirements of MTD, and the summary information for completion of the VAT return must not be physically re-typed into another software package.

What do I need to do?

MTD for VAT is rapidly approaching, and affected businesses need to take action now, if they have not done so already.

If you use an agent to file your VAT returns, you should speak to them as soon as possible to see what plans they have in place for MTD.

If you prepare and file your own VAT returns, you will need to ensure that you have software which will be MTD compatible:

  • If you currently use software to keep your records, speak to your software provider to check whether it is, or will become, MTD compliant, as this may not necessarily be the case.
  • If you do not currently use software, or your current software will not be compliant in time for the launch of MTD, you will need to consider switching provider or explore the use of bridging software.

You should also consider signing up to HMRC's MTD for VAT pilot as soon as possible, as this should give you the chance to file at least one quarterly VAT return using the MTD system before it becomes compulsory next year. This pilot was opened up to more than half a million businesses in October, but more complex businesses (including those who trade with the EU, are based overseas, submit annual VAT returns, or make payments on account), partnerships and those that are not up to date with their VAT affairs may have to wait a little longer before they can join.

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