MTD for VAT – Changes to VAT from April 2019

From 1st April 2019 HMRC will be introducing MTD for VAT, a new digital VAT regime, as the first step towards ‘Making tax Digital’ (MTD).   Yesterday HMRC launched a campaign to inform businesses, and will be writing to all affected businesses.

MTD for VAT will be compulsory for all VAT registered businesses with taxable sales above the VAT threshold.  The VAT threshold is currently £85,000, and not expected to change in 2019.

Businesses currently registered for VAT, but trading below the VAT threshold will be encouraged to sign up voluntarily.

MTD for VATWhat is MTD for VAT?

MTD for VAT, or Making Tax Digital is a concept which HMRC expect will reduce errors in reported data, and make it easier for HMRC’s systems to manage data.  Currently, businesses can choose how to keep records, whether on paper or software, and VAT returns are submitted either via software or by typing VAT figures into HMRC’s free online service.

Under MTD, businesses will be required to keep records digitally (ie. using software), and submit data to HMRC digitally using the same software, or via an unbroken digital link.   Any business currently using bookkeeping software that’s well known in the UK (such as Sage, Quickbooks, Xero, Freeagent, Pandle and more), and up-to-date, should check with their software provider that their software will be compatible.  Most software companies are communicating with customers, and working to have a solution in place.

HMRC will be withdrawing their free online VAT filing service, so everyone affected by the change will need compatible software to keep records and file information.

Spreadsheets and bridging software

According to HMRC’s guidance, although paper records will no longer be adequate, spreadsheets can be used to calculate or summarise VAT transactions to report to HMRC.

The guidance states: “If you use spreadsheets to keep business records, you’ll need MTD-compatible software so that you can send HMRC your VAT returns and receive information back from HMRC. The information must not be physically re-typed into another software package.”

Data that’s cut or copied and pasted, or re-typed won’t be accepted. Although that won’t be enforced until 1st April 2020.

The guidance goes on to state that bridging software may be required to make spreadsheets MTD-compatible. Bridging software is HMRC’s term for a digital tool that can take information from other applications, for example, a spreadsheet or in-house record keeping system, and allows the user to send the required information digitally to HMRC in the correct format.

HMRC’s simplified guidance is here: https://www.gov.uk/government/publications/making-tax-digital-how-vat-businesses-and-other-vat-entities-can-get-ready/making-tax-digital-how-vat-businesses-and-other-vat-entities-can-get-ready

31 March 2020 deadline

Businesses will, according to the guidance, be given until 31 March 2020 to make sure there are digital links between their software products. Before that date, cut and paste will be an acceptable way to transfer information.

The exception to this is where return information is to be transferred to a software product enabled for an Application Programming Interface (an API provides a secure link between software and HMRC) and designed to submit the 9-box VAT return (such as bridging software). In those circumstances, the transfer of information must only be digital.

Software

HMRC has confirmed it will publish details of the available VAT products later this year, but a list of software companies currently working with HMRC to produce compatible VAT software is available on GOV.UK.

The tax authority is currently working with more than 150 software vendors that have said they’ll provide software for Making Tax Digital for VAT in time for April 2019.

What you need to do now

If you use software for bookkeeping, and you’re happy with it, check with your software provider that they’ll be MTD for VAT compatible by 1st April 2019.  The good news is that if you’re already filing VAT returns direct from your software you may not notice much of a difference in the admin.

Otherwise, your options are to find a compatible and ‘future proof’ software provider. Most will provide a free trial period, and even give you a demo.

When the letter arrives from HMRC, please read through it. There will be a sign-up procedure, and more information that you’ll need to act on.

Finally, there is always the option to outsource your bookkeeping and VAT, or just the VAT reporting part.  If you’d like help with anything mentioned above, please get in touch.