Can you claim exemption from Making Tax Digital for VAT?
HMRC has published its long-awaited guidance on exemption – Susan Cattell highlights who might be able to claim and how to do it.
Where is the HMRC guidance?
It has been added to VAT Notice 700/22: Making Tax Digital for VAT and currently forms section 3 of the Notice.
Who does not need to apply for exemption?
Anyone who is already exempt from filing VAT Returns online does not need to apply for exemption.
Businesses with taxable turnover below the VAT registration threshold are not mandated to register for MTD for VAT and therefore do not need to apply for exemption.
Who might qualify but needs to apply?
These businesses fall into three categories. Two of these are likely to be relatively straightforward and relate to businesses:
- Subject to an insolvency procedure.
- Run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.
It is likely that anyone who would be exempt on religious grounds is already exempt from filing VAT returns online. However, this exemption could be relevant in certain limited circumstances where, say, an agent is currently filing the online return for the business – but those running the business would be unable to keep electronic records (which would not necessarily require use of the internet) for religious reasons.
The third category is the one which is most likely to generate correspondence with HMRC and potential appeals. Exemption will be available where:
- It is not reasonably practicable to use digital tools to keep business records or submit the VAT returns because of age, disability, remoteness of location or for any other reason.
Guidance on reasonably practicable
The Tribunal decision in L H Bishop Electric Company Ltd and others v HMRC which related to the introduction of online filing for VAT, could assist in determining what might be considered reasonable in the context of MTD. HMRC gives some indication of its views in the MTD VAT Notice.
It won’t be possible to claim exemption purely on account of age – and HMRC has not set any specific age which would automatically rule someone out of MTD. Instead, it will consider how ‘your age and circumstances impact your ability to follow the rules for MTD’.
Lack of familiarity with relevant software also won’t be enough to claim exemption. HMRC will take into account how much someone uses computers, smartphones and the internet for other purposes – and hence whether it is reasonable for them to learn how to use MTD software.
More generally an exemption won’t be available solely on the basis that reasonable effort, time and cost may be involved in moving to MTD – but HMRC will take effort, time and cost into account in its overall assessment of whether it is practical for someone to follow the rules for MTD. Deciding what is reasonable in this context could be difficult and will vary from business to business according to circumstances.
The guidance also discusses support from friends or family members, which might enable someone who would otherwise qualify for exemption, to meet the MTD requirements – but could be withdrawn. If the support stops and MTD compliance is impossible without it, an exemption application will need to be made.
How to apply for exemption
Applications can be made by telephone or in writing to the VAT: general enquiries team. The following information will be required:
- VAT Registration Number;
- business name and principal place of business;
- the reason for the exemption request;
- details about how VAT Returns are currently filed;
- the reasons why it would not be possible to file returns through software or keep digital records (even if it is possible to file using VAT online services); and
- any other reason why the rules for Making Tax Digital cannot be followed.
HMRC will be issuing decisions in writing. The aim is for a 10-day turnaround, although whether this can be achieved may depend on the number of applications and the volume of other work.
The VAT Notice explicitly notes that businesses should continue to file VAT returns in the way that they usually do if they are waiting for HMRC to make a decision on an exemption request or an appeal after being rejected for exemption.
It isn’t clear what HMRC’s approach to the requirement to keep digital records from 1 April would be if a business has applied for exemption but is still awaiting the response, or the outcome of an appeal, after 1 April. It does, however, seem likely that HMRC would take a reasonable approach in these circumstances.
Let ICAS know what you think
ICAS welcomes feedback on using HMRC processes and dealing with HMRC. If you have any comments on the MTD exemption process please contact the ICAS tax team.