Posted: 26 Mar. 2018 5 min. read

Making Tax Digital for VAT - are you ready for change?

With a quick succession of developments for Making Tax Digital (MTD) in the past couple of months - the VAT Regulations being laid on 27 February 2018, following the draft guidance published in December 2017, and the results of the MTD consultations published on 31 January 2018 – now seemed like a good time to bring you a summary of the key Making Tax Digital for VAT (MTDfV) elements that should be on your radar.

 

While this will eventually be rolled out to individuals, and at some stage corporate tax (though currently deferred), the first tax in the firing line is VAT, and you will be required to implement changes for your business to enable digital VAT reporting from 1 April 2019.  The changes will apply to ALL VAT registered entities (companies, LLPs, sole traders, trusts, charities, etc.).

The government has indicated that it will not widen the scope of MTD before April 2020, once the system has been shown to work.

What does this mean?

From national surveys we understand that 80% of businesses use spreadsheets to prepare their VAT returns and 87% of organisations simply type in the numbers when submitting their VAT return – both of these may need to be adapted or changed in a year’s time once MTD is live.

In order to meet the new regulations, you will need to:

  • prepare your VAT returns in functional compatible software (this can include more than one piece of software in the process) which is ‘digitally linked’ to HMRC’s online portal
  • keep specific electronic records using functional compatible software, and
  • file all 9 boxes of the VAT return automatically with HMRC

Which software is allowed and what does ‘digitally linked’ mean’?

From 1 April 2019, you will need to submit the 9 boxes of the VAT return automatically via an Application Programming Interface (API) which directly connects to HMRC.  This could be in an ERP system, a spreadsheet, tax compliance software, or through a specific piece of software designed to transmit the information directly to HMRC.

In addition, the software used in the preparation of your VAT return will need to be digitally linked which, in our view, may pose the biggest complexity for businesses in Wales.  You’ll be pleased to learn that HMRC have specified that they will introduce a “soft landing period” until 1 April 2020 for digital links within your organisation (however, the API to HMRC is mandatory from 1 April 2019).  After that, data will have to be transferred without manual intervention. This means that re-keying of large amounts of data and using copy/paste functionality will no longer be accepted.  Currently, we expect that, if you use flat files such as csv files and automated downloads, this may satisfy the ‘digitally linked’ requirements.

Many Wales based organisations are already preparing their VAT returns using a combination of the types of software discussed above.  And for those who are not… this may be exactly the catalyst you need to bring about transformational change in the way you prepare your VAT returns to mitigate risks in the current process.

What digital records will you have to keep in the software?

A transactional listing covering tax point, value and rate of tax for Accounts Receivable and Accounts Payable transactions should be kept digitally, but you won’t need to submit this data to HMRC.  You can however, submit supplementary information which provides a further breakdown of the numbers going into your VAT return, but this is on a voluntary basis to start with.

In addition, you will need to keep a digital record of your ‘VAT account’ showing summary totals for items such as:

  • output tax payable at different rates
  • total output tax on reverse charge transactions and acquisitions
  • total amount of VAT recoverable
  • other key summary information

We expect you will be able to derive this from your transactional listing which will provide the digital audit trail to the VAT return.
 
If you’re a complex tax payer, you’ll be used to making adjustments and corrections common to the VAT return process.  While preparing these you will be able to store these offline or in other systems, but you’ll need to include the total amount of the adjustment/correction as a separate entry in the ‘VAT Account’.  We expect this to cover items such as partial exemption, fuel scale charge and other adjustments, where there is no underlying ‘VAT transaction’.

To summarise the requirements, you will need to consider three key areas of digital tax:

  1. Digital Records: generally these come from your ERP or financial systems and include information on the tax aspects of the transaction
  2. Digital Links: these are how tax data passes through your systems and organisation to the VAT Account and ultimately to HMRC
  3. Digital submission: transmission of the 9 boxes of your VAT return via an API to HMRC (The digital link to HMRC via the API is mandatory from 1 April 2019 with no ‘soft landing period’).

What should you be doing now?

From the many conversations I’m having with my clients across the region I can see a few themes emerging.  The most common being that uncertainty about exact requirements is holding many businesses back from taking those initial steps.

However, with a year to go, and some systems taking months (and even years in some cases) to update, now is the time to be looking at your VAT return process, identifying gaps and risks in the processing of VAT data, and understanding how your software “links” together.

It is crucial to monitor the on-going legislation developments too – we expect guidance to be finalised in April 2018 so now is a good time to be working out the likely impact and raising the profile of these changes within your organisation.

What can Deloitte do to help?

According to the Office of National Statistics’ 2016 figures, the South West & Wales region makes up 13% of the UK’s total number of VAT registered businesses with 9% headquartered in the South West and 4% in Wales.  It has been important for us at Deloitte to be at the forefront of developments in MTD to ensure that we can provide our clients with the support they need to address these changes.

As a region we are in a confident position ahead of the changes with Deloitte’s UK VAT Compliance Team being led out of our Bristol office by my colleague Alistair Lord. Alistair's team currently prepares and submits VAT returns for 250 clients which results in over 1000 submissions annually!. We therefore have a wealth of experience of current VAT return processes and practices and are working closely with our clients to help them both keep abreast of, and implement, the necessary changes.

A date for your diary

We will be holding client events in Cardiff and Bristol to discuss this topic. Please contact Vicki Irwin for more information or to register your interest.

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Key contact

Gareth Pritchard

Gareth Pritchard

Partner

Gareth is a partner with over 18 years of experience advising large global businesses on indirect tax matters. He leads the Deloitte UK Manufacturing Indirect Tax team and is also lead indirect tax partner for aerospace and defense businesses across EMEA. He has a special interest in disruptive technologies affecting the manufacturing sector.