Making Tax Digital: 1 April 2019 deadline almost here!

March 11, 2019

What is Making Tax Digital for VAT (MTDfV)?

MTDfV introduces new digital filing and record keeping requirements for VAT and will be compulsory for all entities that are VAT registered in the UK and have an annual taxable turnover exceeding the VAT threshold (currently £85,000). This includes charities and businesses based overseas, even those without a UK establishment.

MTDfV will require almost all UK VAT registered businesses to keep ‘digital records’ and file their VAT returns via ‘functional compatible software’.

MTDfV introduces new the requirement that all applicable VAT return data is kept in a digital format and is ‘digitally linked’ so that transactions can be traced from source data (ie purchase/sales ledger) through to VAT return completion and upload to HMRC.

While MTDfV will change the manner in which VAT returns are submitted, it will not alter the deadlines or the frequency of VAT return filings.

Digital links and digital records

HMRC says a ‘digital link’ is one where a transfer or exchange of data is made electronically between software programs, without the involvement or need for manual intervention (such as the copying over of information by hand or the manual transposition of data between two or more pieces of software). For example, a business may record sales and purchase transactions in its accounting system, transfer the totals to a spreadsheet in which it calculates the UK VAT return figures then send the information to bridging software, which submits the return to HMRC via an online portal. The new law requires these three pieces of software to be ‘digitally linked’.

Requirements for keeping digital records include recording for each transaction the time of supply, VAT exclusive value, the rate of VAT charges, or input tax to be claimed.

See HMRC Notice 700/22 for more information on digital links (paragraph 3.2.1) and record keeping (paragraph 3.3).

When does MTDfV come into force?

Initially, VAT registered businesses must create a digital link between the software containing data for the VAT return boxes to the bridging software and HMRC’s MTDfV system. This requirement comes into force for VAT periods commencing on or after 1 April 2019. So for a business with VAT quarters ending June, September, December and March, the business must submit its June 2019 VAT return digitally.  If a business has VAT quarters ending May, August, November and February, the August 2019 return will be the first VAT return submitted digitally.

HMRC wants to spend more time preparing its systems for organisations with more complex VAT affairs and has stated that mandatory filing under MTDfV will be deferred until 1 October 2019 for the following VAT registered entities:

• Trusts and unincorporated charities
• Local authorities and some public sector entities, including Government departments and NHS Trusts
• Public corporations
• Overseas businesses which are UK VAT registered but do not have an establishment in the UK
• Businesses with one or more of the following VAT profiles:
  • VAT group registration
  • Divisional VAT registration
  • those required to make payments on account
  • those who use the annual accounting scheme.

HMRC has recently written to businesses to notify them of their obligation to use MTDfV and confirm whether they fall into the April or October phases of the rollout. HMRC says that businesses who believe they fall into the October deferral list but have not yet received such a letter should contact HMRC’s VAT helpline immediately. This is because the letter contains a specific legal direction from HMRC authorising them to keep using the existing VAT portal after 1 April 2019.

The requirement for a digital connection into underlying records, such as purchase and sales ledgers, comes into force on 1 April 2020. HMRC has now confirmed that this deadline will be extended to 1 October 2020 for the more complex businesses listed above, so all MTDfV users have a 12 month ‘soft landing period’.