Most VAT-registered businesses have been reporting VAT digitally since 1 April 2019, with more complex businesses coming within the new regime from 1 October. In this briefing we recap the digital reporting rules and consider what the next steps are for businesses.
Who needs to report digitally?
The new reporting regime applies only to businesses with taxable income over the VAT threshold (currently £85,000). Businesses (both incorporated and unincorporated) with turnovers under the threshold are completely exempt from the digital reporting requirements (although they can choose to elect into the regime).
Certain complex businesses (listed below) were given a deferred start date of 1 October to allow additional time for preparation (for HM Revenue & Customs (HMRC) as much as for the businesses themselves):
- Not-for-profit organisations not set up as a company
- VAT divisions
- VAT groups
- Local authorities
- Public corporations
- Businesses (including VAT-registered landlords) that are based overseas
- Businesses required to make payments on account
- Businesses on the annual accounting scheme
With the exception of those public sector entities using the GIANT (Government Information and NHS Trust) system, all of the above groups will now be in the process of transitioning to new rules. HMRC will contact those organisations using GIANT to inform them when their deferral period will end. Once in the regime, businesses will stay there even if their turnover later falls below the registration threshold.
Taxpayers can claim exemption from the digital reporting regime if they are unable to file digitally. This essentially follows the existing tests for exemption from VAT online filing, and includes those who are precluded on religious grounds as well as those whose age or remoteness of location makes digital filing an impossibility. In contrast to the proposals for MTD for income tax, however, there are no wider exemptions.
What are the requirements?
Businesses within MVD need to keep digital records and use MTD-compatible software to submit their VAT returns. Initially, at least, there has been no change to the filing or payment deadlines or to the information actually submitted to HMRC as part of the VAT return.
Businesses can continue to use existing VAT schemes under MVD, including the flat rate scheme, cash accounting and annual accounting. Businesses using these schemes are note expected to keep more detailed VAT records than are currently required, and those in the annual accounting scheme are not required to make more frequent submissions to HMRC.
There is no requirement to keep underlying records (invoices and receipts) in a digital format. However, businesses need to store transactional information including the time and value of each supply, together with the applicable VAT rate digitally. Retailers within the VAT retail schemes can keep a record based on their daily gross takings rather than recording details of individual sales.
HMRC will not automatically transfer your business to digital reporting: you (or your agent) need to actively register your business for MTD. The registration process itself is straightforward, but should only be done once your business has submitted its final VAT return on the old system.
If your business pays VAT by direct debit, you must make sure that you do not register for digital VAT reporting in the seven working days before or five working days after your return is due. Our experience has shown that, even where a business does sign up at the correct time, direct debits are not always transferred across, so we would recommend that you check that your first payment under MTD has gone out correctly.
Are you using the right software?
Before MVD became mandatory, relatively few businesses– around 12% – filed their VAT returns via a software package, so a key issue for many businesses has been the choice of appropriate software to fulfil both the record keeping and submission requirements.
Two key types of software are available – end-to-end solutions (accounting systems which keep the required financial data and which can file a VAT return with HMRC) and bridging software (which acts as an interface between existing software or spreadsheets and which only handles the digital filing element).
Many businesses will now have submitted several returns using their new software systems and this is a good time to evaluate whether their systems and processes are working well. The tax and accounting software market is rapidly developing, with an increasing number of products designed to work efficiently together to give you detailed financial reporting and modelling options as well as generating your VAT return. Growing businesses should also ensure that their software choice remains suitable for their business, and all businesses should have half an eye on the coming extension of MTD to income and corporation tax – although the government is yet to set a firm date for this.
Recognising that not all businesses would be able to have fully digital systems from the outset, HMRC have allowed a ‘soft landing’ period during which some digital links between software are not mandatory. Businesses using more than one piece of software do, however, need to ensure that they have digital links in place between their various systems by April 2020 (or October 2020 for deferred businesses). However, HMRC have recently announced that businesses with complex or legacy accounting systems can apply for a further extension to this deadline. HMRC will consider each case on its circumstances and decide whether to issue an extension – they are not given automatically. Businesses requesting an extension are expected to continue the process to put digital links in place while awaiting a response from HMRC.
We can help you evaluate the best solution for your business, and provide either initial advice to ensure that you are MVD-ready or ongoing support, including maintaining accounting records using our in-house software for those clients who do not want to use software themselves.
We are continuing to engage with both HMRC and software developers on MVD, and will keep you updated as more information emerges.
If you have any queries on the changes, please get in touch with your usual Saffery Champness partner.