MTD for VAT: fact or fiction?

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By Philip McNeill, ICAS Head of Taxation (Tax Practice and Small Business Taxes)

2 April 2019

MTD for VAT: fact or fiction?

MTD has been in continual flux since the first mention of ‘Making tax easier’ and ‘The end of the tax return’ back in March 2015. But priorities have changed and some developments have been sidelines.

With mandatory MTD for VAT underway, how do we go about separating fact from fiction?

1. Fact: Don’t sign up on 1 April 2019

1 April 2019 is a date drummed into everyone’s heads as the start date for MTD for VAT. But in fact it’s imperative that you don’t sign up on 1 April 2019.

Why? Because it is essential to file the last return under the old system before you use the new one. This means that unless you join the pilot and start early, you need to file your last VAT return which covers/straddles the period to 31 March 2019, first.

For example, for January – 31 March 2019 VAT quarterly return, the submission date is 1 April to 7 May 2019. So if you file the last return under the old system in early May, it could be mid-May before you want to register for MTD for VAT.

For clients on the February/May/August/November stagger the first VAT return under MTD would be the quarter to 31 August 2019, due by 7 October 2019.

2. Fact: Don't sign up anytime

If you pay your VAT by direct debit, you need to allow time for the payment to be collected through the old system before you transfer.  You must also allow time for HMRC to transfer the direct debit to the new MTD system ready for the first MTD submission.

HMRC’s recommendation is not to sign-up within five working days after submission of a return is due, and at least seven working days before the next return is due. This is a change from earlier guidance which recommended signing up 15 working days before the next return is due.

For those submitting monthly returns, this gives a window from about the 15th to the 29th of the month to sign up.

Businesses submitting quarterly returns need to be aware of their stagger group. The signing up window relates to the submission dates, rather than the VAT period.

So the quarterly stagger to 31 March 2019 could sign up from 15 May (five working days after filing the March 2019 quarter return). Signing up would need to be completed before 29 July - seven working days before the 30 June quarter is due.

3. Fact: Once you’re in, you can't use the old system

The old gateway isn’t actually blocked, but it will cause no end of a mess if you file through the old gateway once you are signed-up for the new.

Joining MTD means that the business’ records at HMRC are transferred onto the new system. If you file a return through the old portal after joining MTD, the return will be lost.

Remind clients that once in MTD, they shouldn't file the old way. Use the new system. Make sure that your software is MTD enabled and 'switched on' to file via the new API. Some businesses have filed through the old channel by accident.

4. Fiction: Agents can file through the old portal if using the MTD for VAT API fails

Agents need to watch that their software isn’t defaulting to the old system, but is correctly linking to the new MTD for VAT API.

If you try filing the new way, through the MTD for VAT API, and it fails, stop and phone HMRC. Don’t simply revert to filing via the old portal – it will go into a black hole and be lost.

Agents filing returns for clients have four main steps to set up MTD for VAT. That’s two more than a business filing its own returns. These are:

1. setting up an agent services account
2. linking existing agent credentials to the agent services account
3. authorising the MTD software and
4. signing-up each client business to MTD for VAT.

HMRC has produced a summary guide.

5. Fact: Once over the limit you can’t get out

An early version of the MTD for VAT notice (VAT Notice 700/22: Making Tax Digital for VAT) gave the impression that businesses which had ever been over the mandatory threshold, even if under the limit on 1 April 2019, were in MTD for VAT. This has been corrected in the latest version.

MTD for VAT is a lobster pot: but only if you are above the VAT threshold on 1 April 2019, or go over the limit thereafter.

So once in, you must continue in MTD for VAT, even if turnover subsequently falls below the registration threshold. The only exit route then is to deregister for VAT or apply for an exemption.

6. Fiction: It all starts on 1 April 2019

That depends if we are talking records or submissions.

Mandated businesses will need to keep specific records digitally from the first VAT period commencing after 1 April 2019. So if you are on a December stagger, then this means from 1 April 2019 for the quarterly submission 1 April to 30 June 2019.

For businesses on January quarterly stagger, digital records are mandatory from 1 May. For those on February stagger, the date is 1 June.

For businesses which have been deferred, like most public sector bodies and complex groups, this whole timetable is moved on six months.

Businesses making monthly submissions should be ready with digital records from 1 April 2019. They will make the first MTD for VAT submission by 7 June 2019.

7. Digital links are not mandatory for the first 12 months

There has been some confusion here as the wording of the VAT Notice has changed.

The current version reads:

'If a set of software programs, products or applications are used as functional compatible software there must be a digital link between these pieces of software.'

This rule does not apply during the soft landing period except where the data to be included in any of the boxes of the VAT Return has been prepared within a software program, product or application, and this data is then transferred to another program, product or application in order to submit the VAT return data to HMRC via the API platform.

This is included in para 4.2.1.1 in the VAT Notice 700/22: Making Tax Digital for VAT, where there is further information about the soft landing period.

This position is also included in guidance on digital links into bridging software from a spreadsheet, which are mandatory from the start of MTD.

If you intend to use bridging software, then ensure that the transfer of nine-box data into the bridging software is digital.

Other digital links within accounting records have a 12 months soft-landing, so long as businesses are genuinely trying to comply. This includes transferring data to an adviser, or between branches and head office, or between accounting packages, or where data from multiple spreadsheets is combined into one spreadsheet prior to submission.

If you are mandated from 1 April, this means that you need digital links from the first VAT period starting after 1 April 2020. For the October deferral group, it is the first VAT period starting after 1 October 2020.

HMRC has prepared some examples showing Mandatory digital links in Section 8 of the MTD for VAT notice. See examples 3 – 6 showing mandatory digital links from the start of MTD for VAT.

8. Fiction: Deferred or exempt - you don't need to apply

You don't need to apply if you are already exempted from submitting VAT returns online.

If your taxable turnover is below the mandatory registration threshold of £85,000 you are automatically outside MTD for VAT and don’t need an exemption, though you may join MTD for VAT if you wish.

But if you think you should be exempted and are not already, you need to apply at once. Exemption applies where you can satisfy HMRC that:

• It is not reasonably practicable for you to use digital tools to keep your business records or submit your returns, for reasons of age, disability, remoteness of location or for any other reason;
• You are subject to an insolvency procedure; or
• Your business is run entirely by practising members of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records.

You will need to contact HMRC on the VAT Helpline (write, or phone 0300 200 3700) to ask for exemption, unless you are already exempt from online filing. Exemption won’t be granted simply on the basis that a business would find it inconvenient or more expensive to file digitally.

Deferral is slightly different. HMRC has written to all the business it considers should be deferred. All businesses which are deferred need a letter from HMRC to prove it. Any business which considers that it should be in the deferral group but does not have a letter should contact HMRC.

The deferral group, entering MTD from 1 October 2019 include those who are:

• part of a VAT group or VAT Division
• based overseas
• a trust
• a not for profit organisation that is not set up as a company
• submit annual returns
• a local authority
• a public corporation
• make payments on account
• use the VAT GIANT service.

9. Fiction: There will be no penalties in the first year

Existing penalty powers remain in place. Though there has been consultation on a new MTD system of ‘penalty points’, this has yet to be introduced.

The default surcharge system for VAT remains in place with MTD, though ‘reasonable excuse’ is available. HMRC has said that penalties will be waived for the first 12 months of the new system in respect of digital links.

There are a wide range of penalty provisions in respect of VAT. These range from penalties for failing to keep records, to error penalties, to the ‘Carter penalties’ for filing VAT by an incorrect method. The latter could extend to a failure to file via MTD compatible software, without prior agreement of HMRC.

10. Fiction: Manual records are toast

MTD for VAT requires some records to be kept digitally. These are set out in VAT Notice 700/22: Making Tax Digital for VAT, specifically Section 4.3 Records that must be kept digitally.

The full list of records needed for VAT is in Record keeping (VAT Notice 700/21). But paper isn't totally off the agenda.

For example, VAT invoices can be held in paper or digital form, but there must be a digital record of the input/output VAT, value, and date of the supply. Similarly, it may be acceptable to maintain a manual note of daily takings for different retail outlets, so long as the daily totals are entered into digital records as well – perhaps centrally.

Further information

• Making Tax Digital: how VAT businesses and other VAT entities can get ready
• Check when a business must follow the rules for Making Tax Digital for VAT
• Find software that's compatible with Making Tax Digital for VAT.
• Making Tax Digital for VAT as an agent: step by step
• Making Tax Digital for VAT as a business: step by step.
• Making Tax Digital for Business - stakeholder communications pack