MTD - what the future holds
Philip McNeill, Head of Taxation, (Tax Practice and Owner Managed Business Taxes), ICAS, looks at the recent changes to the MTD timeframe.
On 13 July, the Treasury announced a re-setting of the timetable for Making Tax Digital. What does it mean for practices and businesses?
VAT takes the lead
The most substantial change is that VAT becomes the first tax to join MTD. Under the original proposals, MTD for income tax was in first – starting from April 2018, with MTD for VAT a year later.
Now, VAT is the trailblazer with all VAT registered businesses having a turnover over the compulsory registration threshold joining MTD from April 2019.
In terms of date, this is nothing new – MTD for VAT was already scheduled to start in April 2019. But while the focus has been on MTD for income tax, we may temporarily have lost sight of the challenges of reporting VAT.
Under MTD this is done directly from accounting software. With only 12% of businesses currently submitting VAT returns directly from software, there is a long way to go.
Widening the scope
The shift to VAT brings in a wider range of businesses. Part of the focus moves to larger businesses.
Larger businesses may need time to change their software. Some are suggesting a potential lag-time of 18 – 24 months. Is there long enough before April 2019 to do this given that we don’t yet know exactly what MTD for VAT will entail?
From quarterly to quarterly
Given that VAT is already quarterly for most businesses, and most submissions are already made online, what needs to change for MTD?
The key issue is submission directly from accounting software. This is the principal difference which MTD brings across all taxes. For VAT, the challenge is that VAT records may not be entirely integrated within the business accounting software.
Current online submission often involves manual keying-in of some data, even if this is just final totals.
Significant adjustments are often made, and VAT records maintained, on spreadsheets.
This would cover, for example, partial exemption calculation, and other scheme adjustments. It could even extend to bad debts. Bad debts must be recorded in the VAT records, but, though customary, there is no longer any requirement to write them off in the financial accounts.
While HMRC has agreed in principle to the use of spreadsheets within MTD, the detail of how this will be achieved is unclear, and may be difficult to achieve by April 2019.
Simplification before digitalisation
The Office of Tax Simplification in its recent Progress report and call for evidence on VAT outlined a number of areas where simplification might be possible.
ICAS’ response to the call for evidence outlines options including fewer VAT rates, more regular updating of thresholds such as for partial exemption, and a more collaborative approach to penalties.
It would make sense to defer MTD implementation for VAT to allow time for any OTS recommendations to be taken into account. Simplification of the rules could then be built in, and make the process of digitalisation easier.
Unfortunately, the timescale for MTD for VAT is so tight that this is unlikely to be feasible.
Quarterly MTD also brings other challenges. Presumably it means the end of VAT annual accounting, but not of cash accounting for VAT?
Cash accounting for VAT (for turnover up to £1.35m) provides a cashflow advantage for many businesses. But it does not follow that they will want to use, or be eligible for, cash accounting for income tax.
For other businesses, the situation is reversed. While income tax cash accounting might delay tax liabilities, invoice-based VAT accounting could accelerate VAT reclaims.
With a revised entry limit since 6 April 2017 of £150,000 (exit at £300,000) for cash accounting for income tax, this potentially brings another conundrum.
It is not immediately apparent how accounting and reporting systems will cope.
Under the threshold
The situation of businesses below the VAT threshold is not entirely clear. We have an assurance of no mandation for anything other than VAT before 2020, and an open door to join MTD for other taxes as it becomes available.
But what of the future? It seems unlikely that smaller businesses will be excluded ad-lib.
Looking to the future
MTD for VAT could be a significant challenge. Initial private testing this year will be followed by a pilot in Spring 2018. This is a tight timescale for the majority of businesses.
Will it require as much upheaval in recordkeeping software as the original MTD for income tax proposals? Some unincorporated SME businesses have gained a year – no longer joining MTDfB in April 2018 – but are otherwise left facing a very similar challenge.
If cloud accounting is the SME solution for MTD for VAT, where is the difference between this and the original framework?
One thing is clear, a 2020 date means a drawn-out overlap period, with MTD running alongside self-assessment for a number of years.
Policy paper Overview of Making Tax Digital Updated 13 July 2017
Next steps on the Finance Bill and Making Tax Digital – HMRC statement
Treasury statement of the Finance Bill and MTD changes