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Written by: David Wilson

David Wilson

Technical Associate Director

Making Tax Digital for VAT - impossible, impractical or unduly onerous?

  • March 2018
  • 3 minutes

In a mere 13 months’ time, the UK’s VAT-registered businesses will face major challenges in the accounting, recording and reporting of VAT.

Despite the uncertainty over the impact of Brexit, and how, when and even whether UK businesses will have to account for, report and pay import VAT and duty that is likely to be applicable on supplies from the EU, the UK is, nevertheless, implementing Making Tax Digital (MTD) for VAT-registered businesses from 1 April 2019.

Whilst MTD has been delayed for other taxes until at least 2020, the introduction of MTD for VAT will require all VAT-registered businesses with turnover above £85,000 per annum to submit their VAT returns digitally to HMRC - no more manual keying of return data into HMRC’s portal.

Under MTD, businesses must keep certain mandatory records in a digital format within ‘functional compatible software’, able to interface with HMRC’s systems, and thus send and receive information to and from HMRC. Taxpayers using multiple accounting software packages to record or calculate information that drives VAT return data must digitally link them to be MTD compliant.

The keeping of records in a digital format will therefore require businesses to have their sales broken down by the value of standard-rated, zero-rated, VAT exempt and outside the scope supplies. For those businesses which suffer a restriction in their VAT recovery, eg those involved in the finance, insurance, real estate, health, welfare and charitable sectors, there is the further complexity of identifying, on an invoice by invoice basis, the amount of VAT that can actually be recovered for each purchase invoice received.

Given the complexities involved, and the fact that businesses will need to have access to MTD compliant accounting packages, it was encouraging that HMRC published a consultation, and invited VAT-registered businesses to volunteer in a pilot to trial and test the MTD process before mandatory implementation.

However, some eighteen days after the consultation closed, and before the MTD pilot has even begun, it is extremely disappointing that the government has introduced the MTD for VAT legislation, without apparently taking any heed of the concerns and observations aired by professional bodies, advisers or impacted businesses, and without the benefit of any feedback from the MTD pilot. 

Adequate and appropriate legislation is crucial for the implementation of MTD. However, if all the complex issues which a significant number of VAT-registered businesses may face, particularly in a post-Brexit environment, have not yet been fully identified and adequately addressed, there must surely be serious concerns whether MTD should ‘go live’ in April 2019.

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