accountants and business advisers
10 Aug 2018
The Making Tax Digital (MTD) initiative is part of HMRC’s plan to become ‘a world leading digital tax authority’. But what does it mean for companies? Nick McChesney examines the issues.
HMRC’s aim is to make tax reporting more effective and to make it easier for taxpayers to get their tax right using digital technology.
The first real implementation deadline for MTD relates to VAT. HMRC hopes that by doing so it will reduce losses in VAT revenue due to errors in VAT accounting. For return periods starting on or after 1 April 2019, VAT registered businesses with a taxable turnover above the VAT threshold (£85,000) in a twelve-month period will have to comply with the MTD rules. VAT registered businesses with taxable turnover on or below the threshold can sign up to MTD for VAT if they wish but will not be compelled to do so.
All affected businesses will have to:
All VAT accounting records will need to be held on ‘functional compatible software’. Sources of VAT return data will need to be digitally linked to the VAT return so that transactions can be traced from purchase/sales ledger to VAT return completion and uploaded to HMRC’s system without manual transcription.
At present, only the content of the nine boxes shown on the VAT return is submitted to HMRC; there is currently no facility to provide HMRC with supporting data in a digital format. Under MTD, software will allow businesses to submit supplementary data to HMRC. Although this will be voluntary, businesses that submit this data may be exposed to less rigorous compliance checks and should consider this option.
VAT registered businesses with taxable turnover above the VAT threshold (currently £85,000) will have to comply. Many smaller businesses or those which make only exempt supplies are not required to be registered for VAT. As MTD only applies if taxable turnover exceeds the VAT threshold, they will not therefore need to comply with the new MTD rules although business which are voluntarily registered and below the threshold can adopt the MTD rules if they wish.
For these purposes, taxable turnover will include sales made at the standard or zero-rate. Businesses supplying services to customers outside the UK, which do not attract UK VAT have the facility to be voluntarily VAT registered. This enables them to recover VAT on costs. However, these services are not zero-rated and so are not part of taxable turnover.
Businesses that receive services from overseas may find that they need to navigate the MTD rules. The system of VAT accounting for UK in-bound supplies can render the recipient liable to VAT if the supplier is established overseas. This obligation to self-account for the VAT is known as the ‘reverse charge’ and the relevant amounts are taken into account in determining taxable turnover.
Companies affected by MTD will need to have their systems in place to enable the first returns to be submitted digitally after 1 April 2019. This does not give long for decisions to be made over the adequacy of existing software and record keeping, to test compatibility and to ensure that system users are aware of the new requirements. The first steps businesses need to take are to establish whether the changes will affect them, identify current gaps in compliance and what needs to be done to implement the required changes.
We plan to work with a number of our clients to trial the new systems once HMRC’s existing limited pilot testing is extended to a wider group of users later this year.
Article By PKF Littlejohn
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