Businesses could have much to do to ensure compliance, warns Lerona Waskar, senior tax consultant at Elman Wall
We live in a digital age, surrounded by smart phones and watches and smart home devices. We are consumed by technology every day and there is no turning back.
It was only natural, that HMRC would soon come of age. That is the digital age.
In Budget 2015, the government set out its vision of transforming the tax system. It published a roadmap to Making Tax Digital (MTD); to make tax administration more effective, more efficient, and easier for taxpayers.
It is HMRC’s ambition to become one of the most digitally advanced tax administrations in the world.
Three years later some harboured hope that the 2018 Budget would postpone further, or even cancel, the introduction of MTD given the difficulties encountered to date.
However following The Chancellor’s speech on the 29 October it is now here to stay, so the question becomes are travel businesses ready?
Why is HMRC Making tax digital?
According to government statistics, in 2014-15 over £3.5 billion of revenue was lost due to mistakes in VAT returns alone.
With MTD, HMRC hopes to significantly reduce errors by make it easier for individuals and businesses to get their tax right the first time, lowering the chance of VAT compliance checks, which can be expensive and burdensome for both travel businesses and HMRC
MTD is intended to firstly cover VAT, to then be followed by other taxes like income and corporation tax. However for now it is just VAT that has a mandatory start date of 1 April 2019. MTD will not be extended to other taxes before 2020.
When does MTD for VAT apply from?
MTD will become mandatory for VAT return periods starting on or after 1 April 2019, for businesses with turnover above the VAT threshold, which is currently £85,000.
On 16 October 2018, HMRC announced MTD for VAT would be deferred for some businesses that have a more complex VAT affairs.
This applies to organisations such as trusts and non-corporate ‘not for profit’ associations. However this also includes VAT groups and businesses in special schemes.
It remains to be seen whether this latter aspect encompasses TOMS. Further advice from HMRC is awaited on this point.
With 1 April 2019 only a matter of months away, HMRC have now opened up the pilot scheme, initially to sole traders and companies.
This pilot will be extended further as the mandatory commencement date draws nearer.
How will MTD for VAT work?
The essence of MTD means that travel businesses will need to:
• keep digital VAT records, and
• submit VAT returns via a functional compatible software.
This is the first time any tax authority in the world has sought to dictate the way in which records should be kept, which in this case is using a MTD compliant software.
HMRC however have confirmed any information not required to complete a VAT return may be excluded from this requirement. As per HMRC guidance the following designated data will need to be kept digitally:
• your business name;
• the address of your principal place of business;
• your VAT registration number;
• any VAT accounting schemes that you use.
Apart from the above standard information, digital records will need to be maintained for each supply made/received:
• time of supply;
• value of the supply (excluding VAT);
• rate of VAT charged for supplies;
• the amount of input tax that you can claim on purchased.
In addition, businesses will need to maintain further information on both input and output VAT example split between standard rate, reduced rate, zero rate, exempt and supplies/purchase which are outside the scope of UK VAT.
Functional compatible software
The submission of VAT returns will change from the current utilisation of the HMRC Portal due to the requirement to use functional compatible software.
Functional compatible software is a program that can:
- record and preserve digital records;
- provide information and returns to HMRC from these digital records by using the Application Programming Interface (API) platform;
- receive information from HMRC via the API platform.
After a slow start many commercial software suppliers now have their offerings available. However those using bespoke software may still need to ensure this will be HMRC compliant by 1 April 2019. This potentially is further complicated by the aspect of ‘digital links’.
Where digital records are maintained on two or more software programs, data transfer or exchange between these programs must be digital.
Further, once data has been entered into the software, any further transfer, recapture or modification of that data must be done using a digital links.
HMRC defines digital link as one where data transfer or exchange can be made electronically without manual intervention.
HMRC will accept the following (not exhaustive) list as digital links:
• emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation;
• transferring a set of digital records onto a portable device, example a pen drive and physically giving this to an agent to import that data into their software;
• XML, CSV import and export, and download and upload of files;
• automated data transfer;
• API transfer.
The digital links requirements will not become mandatory until 1 April 2020, which HMRC calls a ‘soft landing period’.
For more information on digital record keeping under MTD can be found at VAT Notice 700/22: Making Tax Digital.
MTD for VAT is Coming!
Many have questioned HMRC on their lack of correspondence with the VAT registered businesses on the impending MTD changes.
However this is about to change as HMRC finally start their publicity campaign on the introduction of MTD for VAT.
April 1 may still seem some time off, but businesses could have much to do to ensure they are actually fully compliant. Are you ready?
Lerona Wasker is a Senior Tax Consultant with Elman Wall. She can be contacted on Lerona.Waskar@elmanwall.co.uk