I recently saw an article reporting that HMRC has not yet prosectured any businesses who trade on Ebay, Amazon and other online platforms for VAT avoidance. I don’t know whether the report is true, but if so, I can only assume that part of the reason is the difficulty in accessing businesses’ accounting records. So I wonder whether “Making Tax Digital for VAT” will make it easier for HMRC to stamp out such VAT avoidance.
In September 2017, HMRC announced the draft legislation for “Making Tax Digital for VAT” (or “MTDV” for short!). Their overview, published on 17 September, set out the proposed changes to the legislation and confirmed that:
Businesses in scope for MTD will need to keep their records digitally, using approved MTD functional compatible software, from 1 April 2019.
The functional compatible software will create the return from the digital records, so businesses will need to start keeping digital records and then submit VAT Returns via functional compatible software for return periods starting on or after 1 April 2019.
MTDV overview, 17 September, 2017 http://tinyurl.com/yawlyw87
This month, the CIOT issued a revised MTDV “Status table” setting out the main differences between the current record keeping and accounting requirements and those that will be required from April 2019: 180504 MTD for VAT – main issues for consideration – table
Even though I’m a VAT consultant, I admit that I am no expert on the subject of “Making Tax Digital”, never mind its application to VAT. My business’s VAT affairs are relatively simple, but I act as agent for a number of clients, including non-UK based companies, so I have to be very careful to ensure that my accounting system meets all of the criteria, particularly for client VAT returns.
I’ve spent some time looking at the status table and what I find interesting is that there are 4 main differences to the current record keeping/VAT accounting requirements:
- Business must use ‘functional compatible software’ (digital records) that can ” connect to HMRC’s systems via an Application Programming Interface (API).”
- The figures for the VAT return must be calculated and transferred to HMRC directly from the digital records with no manual input through this process.
- The system must be able to store records for at least 6 years (as at present) but also be able to, among other things, prepare the VAT return and provide HMRC with additional data as required.
- The system must retain specific details including the net value of sales and purchases at each different rate of VAT and the amount of VAT charged/claim, plus similar information about imports and exports and intra-EU transactions – subject to the post Brexit arrangements.
Essentially it is taking the human touch out of the system and requiring businesses to keep additional information about sales and purchases, enabling the information to be provided to HMRC via an API.
No more hand-written ledgers?
Of course we don’t have the full details of the records that must be retained; this information will apparently be set out in a VAT Notice to be issued later this year.
I know that there has been a lot of discussion about this issue in the accountancy and tax press over the past couple of years, so I doubt that I can add anything meaningful to the conversation. If anything, I’m surprised it has taken so long for HMRC to introduce the change. Most businesses have been using digital accounting systems for several years and there are many accounting software programs that can prepare the more detailed information required under MDTV. It takes time to get legislation written and passed through parliament, but the UK’s existing record keeping requirements are essentially the same as in 1981, when I joined HM Customs & Excise as a VAT officer, so it really is time to modernise.
On the plus side, making tax digital for VAT will be an important step in enabling HMRC to manage the VAT system and, one hopes, those non-UK businesses who don’t pay UK VAT on sales to UK customers. Either way, the days of hand-written ledgers and black plastic bin liners full of purchase invoices are probably coming to an end. Though some of those ledgers were valuable historical documents and I hope they don’t disappear from the business world entirely.