Making Tax Digital - back to basics and future rollout
It’s now a year since MTD for VAT was first introduced in April 2019. This article presents a reminder of the basics as well as a look at the future rollout of MTD to other taxes.
In December 2018, and updated in February 2020, HMRC offered webinar guidance to agents on the introduction of MTD for VAT.
The main rules can be found in VAT Notice 700/22: Making Tax Digital for VAT, first published in July 2018 and updated in October 2019.
What is MTD for VAT?
As most of us know, MTD for VAT means using MTD compatible software to record business transactions, prepare the VAT return and exchange information with HMRC using API (Application Programming Interface) enabled software. The API software does not send every transaction to HMRC, just the 9 box VAT return figures. HMRC systems cannot interrogate an agent’s (or client’s) software or take detailed transaction information from it. Agents who wish to act for their clients in MTD require a new Agent Services Account (ASA) per firm. According to HMRC, as at February 2020, over 33,000 ASA’s had been created.
Timelines and compliance
On 1 April 2019, MTD was mandated for all VAT registered businesses with taxable turnover above the VAT threshold (currently £85,000); meaning businesses were required to use MTD from their first VAT period starting on or after 1 April 2019 (or 1 October 2019 for those deferred; estimated at 3.5% of the VAT population by HMRC). For businesses with taxable turnover at or below £85,000, MTD remains voluntary, even for those which are VAT registered but on a voluntary basis.
According to HMRC, at the end of January 2020, over 1.29 million businesses were signed up for MTD (including some voluntarily) and over 3.12 million VAT return submissions had been made.
There are some exemptions from MTD including those who are already exempt from online filing for VAT, insolvent businesses, those exempt on religious grounds and those for whom it is “not reasonably practicable” (on the grounds of remoteness of location, meaning the internet is not accessible, disability or age) with each case being considered on its own merits.
In terms of penalties, Jim Harra, HMRC’s new Chief Executive, recently confirmed that HMRC’s ambition is to help businesses moving to MTD to get it right, not to penalise them. HMRC’s decision not to enforce penalties is intended to help businesses transition to MTD without fear of getting it wrong. However, sanctions remain possible in cases of deliberate non-compliance.
Software and digital links
Where a trader wishes to use a spreadsheet to prepare their VAT return figures, it must be API-enabled. If it is not, a bridging product is required using an ‘external’ digital link to transfer the VAT return information to HMRC. In addition, ‘internal’ digital links are needed between the software products used to gather the VAT return figures within, for example, VAT groups or the different parts of a trader’s business registered under the same VAT number. Due to the timescales involved in putting these ‘internal’ digital links in place, a 12-month soft landing period, until 31 March 2020, was allowed by HMRC for these links only.
For VAT periods starting on or after 1 April 2020, full digital links are required unless the trader is, for example, a business with complex or legacy IT systems and so needs longer to put ‘internal’ links in place. In which case, an application can be made for extended deferral until 1 October 2020. It is now expected HMRC will further extend this deadline to 1 April 2021 as a result of COVID-19.
The future of MTD, including the rollout to other taxes
MTD for income tax is now being developed and, according to HMRC, approximately 1 million sole-traders, landlords and partnerships are currently eligible for the voluntary 2020/21 pilot service.
However, a survey recently carried out by CIOT and ATT found that MTD for income tax was the least popular choice to be mandated next with most respondents selecting corporation tax for those already mandated for MTD, followed by the extension of MTD for VAT to those businesses that are voluntarily VAT registered. Respondents were also found to want long lead-in times (with April 2025, supported by a two-year pilot period, being most popular).
ICAEW made a 2020 Budget request for Government to review the rollout and costs to business of MTD for VAT before it decides whether to extend it to other taxes. The Government responded with the publishing of an evaluation of the MTD for VAT service and update on the Income Tax Service on 19 March 2020. In it, HMRC state they are carefully monitoring the transitional costs for businesses and are committed to working with stakeholders to ensure the lessons learned from the roll-out of MTD for VAT inform the next phases of MTD. This remains to be seen.