HMRC's vision to digitalise the UK tax system is well underway. Businesses and landlords will be required to use commercial software to maintain their records and to update HMRC quarterly, starting with VAT.
9 January 2018
MTD for VAT will apply to VAT registered businesses with turnover above the VAT threshold. This includes unincorporated businesses, companies, LLPs, and charities. Businesses registered for VAT but with turnover below the VAT threshold can opt in and file their VAT information via MTD if they wish.
|Start date||We expect that a business will be have to keep digital records and submit its VAT returns digitally with effect from the first VAT return period beginning on or after 1 April 2019.|
|Exemptions||The exemptions that currently apply for electronic VAT filing will be extended to cover MTD for VAT. There will be an automatic exemption for businesses which are registered for VAT but have turnover below the threshold. These businesses must elect for the exemption not to apply if they wish to submit their VAT information under MTD.
||At this time we understand there will be no free software for MTD for VAT. HMRC is working closely with software providers to ensure a range of suitable products will be available.
Commercial software must be able to:
The use of spreadsheets will be permitted although they will need to be combined with third-party commercial software, using APIs, to ensure a seamless flow of data from the business to HMRC (and vice versa).
|Digital record-keeping requirements||HMRC has confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally.
HMRC has stated that the following records will need to be kept digitally:
• Your business name
• The address of your principle place of business
• Your VAT registration number
• A record of any VAT accounting schemes that you use.
For each supply you make you must record:
• The time of supply
• The value of the supply
• The rate of VAT charged.
If you make multiple supplies at the same time these do not have to be recorded separately. You can record the total value of supplies on each invoice or receipt that have the same time of supply and rate of VAT charged. You must also have a record of outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.
For each supply you receive you must record:
• The time of supply
• The value of the supply including any VAT that is not claimable by you
• The amount of input tax that you will claim.
If more than one supply is on an invoice you can record the totals from the invoice.
The VAT account is the link - the audit trail - between your business records and your VAT return. Under MTD for VAT, the information required to be held in the VAT account must be kept digitally (the regulations refer to this as your “electronic account”), and the information in that electronic account will be used by functional compatible software to calculate and fill in your VAT return.
To show the link between the output tax in your records and the output tax on the return, you must have a record of:
• the output tax you owe on sales
• the output tax you owe on acquisitions from other EU member states
• the tax you are required to pay on behalf of your supplier under a reverse charge procedure
• the tax that needs to be paid following a correction or error adjustment
• any other adjustment required by VAT rules
To show the link between the input tax in your records and the input tax on your return you must have a record of:
• the input tax you are entitled to claim from business purchases
• the input tax allowable on acquisitions from other EU member states
• the tax that you are entitled to reclaim following a correction or error adjustment
• any other necessary adjustment
Records must be kept for six years (or 10 years if you use VATMOSS). Digital records will need to be maintained for six years following deregistration.
|Monthly and non-standard returns||Businesses will still be able to submit monthly and non-standard returns under MTD.|
|Periodic updates||Businesses can, if they wish, provide information more frequently than quarterly.|
|Flat rate scheme
||Businesses will still be able to use the flat rate scheme under MTD meaning digital records of purchase invoices will not be required (unless they relate to capital items which cost more than £2,000 including VAT).|
|Annual accounting scheme
||Users of the annual accounting scheme will continue to send in one annual VAT return rather than quarterly reports under MTD.|
|Retail scheme||Retailers will be able to record gross daily takings rather than each individual transaction|
||The existing error correction rules will apply under MTD. In some cases, amendments can be made through the MTD compatible software.|
While income tax will not be mandated until April 2020 at the earliest we have outlined below what we know about how it is likely to work. Software pilots are ongoing and businesses should speak to their software provider in the first instance.
The first step for unincorporated businesses will be to consider how they will comply with the new requirement to keep electronic accounting records using commercial software. Landlords receiving income from property will also be required to maintain electronic accounting records and to update HMRC quarterly.
Businesses which have appointed an accountant should discuss the changes, and how they will comply with their tax compliance obligations in the future, with their adviser. Those businesses who have not appointed an accountant will also need to consider how they deal with the more frequent record keeping and reporting obligations.
It is likely there will be some limited exemptions available: for example, those with annual turnover below a set amount (previously £10,000 was suggested) and those who are unable to engage digitally – businesses which consider they are exempt may be required to apply to HMRC for the exemption.
Although the start date for MTDfB for unincorporated businesses has been deferred we encourage businesses to review existing record-keeping practices and discuss with an agent, where one is used.
HMRC published draft primary and secondary legislation in September 2017 below you will find a summary of the main requirements:
|Start date||Under the original MTD timetable, MTDfB obligations were to start with effect from the first accounting period beginning after 5 April 2018. The legislation is now drafted in such a way that the obligations are likely to begin with effect from the first accounting periods beginning after 5 April of the relevant tax year that MTDfB is introduced.|
||Free software will be available to businesses with the most straightforward affairs. HMRC’s working assumption is that these businesses are likely to be those that are unincorporated, have income under the VAT threshold, and have no employees. HMRC is currently working with software developers to define the minimum functionality of a free software package that would meet MTDfB requirements. It is proposing that the minimum offering would allow businesses to:
- keep digital records
- generate and send quarterly updates to HMRC
- complete end of year activity to ensure compliance with MTDfB requirements
- include arithmetical error correction
- include a basic level of built-in prompts and nudges and basic help functions, and
- enable information to be sent from HMRC to businesses about their tax liability.
There will be no free software provided by HMRC for agents. This means that in future, all agents will need to purchase commercial software.
|Spreadsheets||Businesses will be able to continue to use spreadsheets for record keeping, but they must ensure that their spreadsheet meets the necessary requirements of MTDfB and this will involve combining spreadsheets with software.|
|Three line accounts||Under the current system, businesses with annual income below the VAT threshold are eligible to use ‘three line accounts’, meaning only income, expenses and profit need to be reported. Under MTDfB, these small businesses will be able to submit a quarterly update with only three lines of data in the same way.|
||HMRC has confirmed that the requirement to keep digital records does not mean that businesses will have to make and store invoices and receipts digitally. Businesses can continue to keep documents in paper form if they prefer, although transactions will need to be stored digitally. It will still be possible to compile the digital records at quarterly intervals, using a book keeper or other agent if required, provided the information is entered into a digital record keeping system at that stage.|
|Quarterly updates||Businesses will be able to choose their periods of account and their update periods. The basic requirement will be for four quarterly updates a year. The draft legislation does not allow HMRC to require returns more often, but a business can submit extra updates mid-cycle if it wants to submit an extra one. The time window for submission will be from 10 days before the quarter end to one month after.
The information submitted will be either three line account information, or based on the level of detail required by the current system of categorisation in the self assessment return.
|Multiple businesses||We understand that a quarterly return must be filed for each businesses, for example, an individual operating as a sole trader who also has a property business would need to make eight quarterly returns.
|End of year activity||The deadline for finalising taxable profit for a period will be 31 January following the year of assessment in which the profits for that period of account are chargeable to income tax (the existing self assessment deadline).
This finalisation could be done at the same time as the final regular update for the year is submitted, but for businesses making year-end adjustments or claims to reliefs, it is more likely to be done later.
|Late payment penalties and interest||On 20 March 2017, the government published a consultation document on the proposed model for late submission penalties and on penalties for late payment of tax, to which we responded in ICAEW Rep 68/17. The summary of responses, published on 1 December, confirms the announcement at Autumn Budget 2018 that the government intends to proceed with a points based penalty system for late submission. Comments are not being invited at this stage but there will be a technical consultation on the legislation in 2018. The government then intends to apply the new model in phases to different taxes. It is anticipated that the model will first be implemented for VAT, commencing in 2020, following a soft landing period of 12 months.|
Following consultation, the entry threshold for the cash basis increased from 6 April 2017 to £150,000 with the exit threshold set at double the entry limit. For universal credit claimants the entry and exit threshold is now £300,000.
Finance (No 2) Act 2017 also sets out new rules relating to capital/revenue divide with effect from April 2017:
Individuals with property income will be required to comply with MTDfB requirements. For jointly owned property, each individual must make a digital record for their share of income and expenditure.
We understand that further to consultation, HMRC has decided that a digital record will be required for a property business as a whole rather than property by property. We are waiting for further information about different types of property businesses and how this will work.
A number of changes were introduced from 6 April 2017. Property businesses and landlords should be aware that:
MTD for corporation tax will not be mandated until April 2020 at the earliest. We are expecting a formal consultation in early 2018.