Making tax digital for VAT

November 1, 2017

Mark Hetherington, VAT partner at UNW, reflects on some of the challenges facing business owners as Making Tax Digital becomes a reality

What changes have HMRC made to the original Making Tax Digital (MTD) roadmap, and how will it affect VAT? 

Ever since the original roadmap for MTD was laid out by HMRC in December 2015, there have been constant disagreements and setbacks. Initial consultations and a report by the Treasury Select Committee in January 2017 highlighted several flaws with the proposed timetable. As a result, HMRC have deferred the wider roll-out of MTD until 2020 at the earliest. In the short-term, only businesses above the VAT registration threshold (currently £85,000 per annum) will have to keep digital records, and then from April 2019 only for VAT purposes. April 2019 may seem like the distant future, but MTD will require businesses to make essential changes to the way their finances are managed sooner rather than later.

Why is VAT the first tax to be subject to MTD? 

Since 2010, it has been compulsory for VAT returns to be submitted online and HMRC probably see VAT as the natural first step when looking to introduce the scheme across all taxes. Submitting VAT returns online is currently a simple process and, when combined with the provision to pay quarterly VAT liabilities by automatic direct debit, provides businesses with a short-term cash flow benefit.

Under new rules, businesses will use a software platform to connect directly to HMRC, providing information from digital records they have kept. It is important to note that ‘information’ being supplied under MTD will be more comprehensive than is currently shown on a VAT return.

Will this make the process simpler for businesses? 

Perhaps, but I have a certain apprehension about the capabilities of accounting software being used to automatically submit VAT returns on behalf of businesses. The current versions that are available are only suitable for straightforward VAT return declarations, and cannot handle more complex VAT return calculations involving partial exemption which require human intervention and an eye for detail. HMRC are rolling out pilot studies later this year, so hopefully any problems will be ironed out.

Most VAT returns are already filed on a quarterly basis, so what impact, if any, will the mooted changes have? 

The MTD initiative places emphasis on the provision of information to HMRC on a timelier basis, but VAT returns are already quarterly. This, coupled with the fact there are already automatic penalties for late returns, makes the situation a little confusing. If something isn’t broken, why fix it? I think HMRC would be wise to spend their time and limited resource on more pressing matters that businesses are concerned about, particularly with Brexit on the horizon.

On the topic of Brexit, what are the potential implications on VAT in the UK? 

Brexit will more than likely have very little impact on VAT where a business solely trades within the UK. Rates of VAT are likely to stay the same, albeit HMRC will have more flexibility on the application of the reduced and zero rates – something on which being a Member of the EU has meant our hands are generally tied. Overall this should be positive news to the wider UK economy. However, where a business currently trades with businesses or customers located in any of the other 27 member states, the probable re-introduction of import and export declaration requirements will introduce a significant burden, and possibly delay the movement of goods in and out of the UK.

To learn more about UNW’s VAT and indirect tax services contact Mark at
0191 243 6000

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