Recent changes to Making Tax Digital for VAT and the new VAT Registration Service
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
3 November 2022
Chris Campbell outlines changes to Making Tax Digital for VAT and some key features of HMRC’s new VAT Registration Service
What is changing with Making Tax Digital for VAT?
As a significant milestone in the move to Making Tax Digital (MTD), all VAT registered businesses will now need to register for MTD and submit their VAT returns using MTD compatible software going forward. From 1 November 2022, most VAT registered businesses will no longer be able to use their existing VAT online account to submit returns.
Special rules will apply for VAT registered businesses with turnover below the £85,000 VAT registration threshold with a VAT return due for submission before 7 November 2022. Those businesses can continue to use their existing VAT online account for their November VAT return only, thereafter they will also be required to comply with the MTD regime. It will still be possible for VAT registered businesses filing annual VAT returns to do so via their existing VAT online account until 15 May 2023.
Unless exempt, HMRC will thereafter expect VAT registered businesses to submit MTD compliant returns or they may be subject to a penalty. HMRC has issued guidance on MTD compatible software.
How may a business be exempt from MTD for VAT?
HMRC has published detailed guidance on MTD exemptions in VAT notice 700/22. This will affect VAT registered businesses where it is not reasonable or practical to use computers, software or the internet in order to submit VAT returns under MTD. Details of how to apply for an exemption for MTD for VAT can be found on the HMRC website.
Examples of potential grounds for an exemption include age, disability or location, as well as VAT registered businesses that are run entirely by practising members of a religious society (or order) whose beliefs are incompatible with using electronic communications or keeping electronic records.
There will be cases where the location of a business may entitle them to an exemption, in particular where there is no internet access available at the home or business premises and it is not reasonable to obtain access at another location. Internet access and poor broadband connectivity has been highlighted by ICAS Members as a concern in our recent 2022 Practice Survey, so this may be particularly relevant for businesses in rural areas.
HMRC will consider all applications for an exemption on an individual basis and will take account of all the relevant circumstances. VAT registered businesses who are already exempt from filing their VAT returns online and those subject to an insolvency procedure should automatically be exempt from filing their VAT returns under MTD.
What penalties will be charged for non compliance with MTD for VAT?
Aside from the usual penalties for late submission of VAT returns or late payment of VAT, there are specific penalties in respect of non compliance with MTD for VAT. HMRC has produced a fact sheet stressing the importance of using MTD compliant software, the need to maintain digital accounting records, and the use of ‘digital links’ to transfer or exchange data.
Where a return is not submitted using MTD compliant software, HMRC will be able to charge a penalty of up to £400 per return. In addition, HMRC will be able to charge daily penalties of between £5 and £15 per day where digital accounting records have not been maintained or where ‘digital links’ have not been used to transfer or exchange data between software. Further penalties of up to 100% of the tax due can be charged where there are errors included in the VAT return.
How has HMRC changed the process of registering for VAT?
HMRC changed the VAT registration process from 1 August 2022, with the introduction of the new VAT Registration Service (VRS) for businesses and agents. New agents can separately follow the process of registering as an agent using separate guidance on the HMRC website.
A key change is that new businesses will be registered for MTD automatically as part of the VRS. Applications for a MTD exemption can then be made in the usual way, where applicable. From our ongoing contact with HMRC, ICAS understands that exemption applications are currently being prioritised based on the due date of VAT returns.
An agent accessing the VRS on behalf of clients will need either:
- an Agent Services Account (ASA) ID and password
- a HMRC Online Services account ID and password
HMRC has advised that the quickest and most straight forward way to register a client for VAT is to follow the steps to register for VAT online using Agent Services Account credentials. For applications via the ASA, HMRC will ask agents to provide their name, phone number and email address in case of queries regarding the application. If an agent uses their old HMRC Online Services account, they may be asked for details to verify their identity such as their National Insurance number, date of birth and passport or driving licence.
To complete a VAT registration, an agent will need:
- client’s name
- client’s date of birth
- client’s National Insurance number
- a form of ID from the client, such as their passport or driving licence
- details of turnover and nature of business
- client’s bank account details (or a reason if no bank account details are provided)
- Unique Tax Reference (UTR) number, where available
VAT registrations for companies will require the company’s UTR. It is possible to register an individual for VAT without a UTR, but this must be supplied if the individual is already in Income Tax Self Assessment.
Where all the relevant information is not available immediately, it is possible to save an application in the VRS for 28 days, so that it can be revisited and completed at a later date.
HMRC has advised that agents will be given the option to register for an EORI number as part of the VRS application. This information is then sent automatically to the EORI team who will begin the process of setting up an EORI number and contact the client directly.
HMRC has already made some improvements to the new VRS, following feedback from stakeholders, including ICAS. Others are in the pipeline and HMRC has made clear that it intends to keep the operation of the VRS under review, so there may be further improvements in future.
Let us know your views
We welcome Members’ input to inform our work on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by Members.
Useful MTD links
- Agents: use software to submit VAT Returns - A guide for agents, outlining how agents and their clients can sign up to MTD for VAT.
- VAT notice 700/22