Making Tax Digital
The way all businesses, including law firms, deal with their VAT Returns will change from April 2019. Making Tax Digital for Business (MTD) is the government’s vision to have one of the most digitally advanced tax systems in the World. In their words “to improve efficiency and to reduce error”. By forcing businesses to store and share information digitally, HMRC will have quicker access to data and clear audit trails from source documents to filed returns.
You will need to ensure you have compliant systems in place for VAT before April 2019 and ideally by the end of this calendar year. MTD will be extended to Corporation Tax in April 2020. The rules apply from your first VAT period starting on or after 1 April 2019. A ‘VAT period’ is the inclusive dates covered by your VAT Return.
The first step in the MTD process focuses on the way VAT return information is stored, processed and communicated and will impact all VAT registered businesses.
From April 2019 “businesses must be capable of keeping and maintaining the records specified in the regulations, preparing their VAT returns using the information maintained in those digital records and communicating with HMRC digitally via an Application Programming Interface (API) platform” (HMRC VAT notice 700/22).
Visually, this means the following:
In general, the requirements will place different pressures on your business depending on how complex your VAT position is. For simple VAT structures, there are software solutions available that will quickly make you compliant. Hopefully, the records you currently keep and the systems you currently use will work, but you need to be sure they do.
CUTTING THROUGH THE JARGON
When you speak to your tax advisers and to your IT suppliers, there are phrases they may use that you may not be familiar with so here is our summary of the important ones:
• FUNCTIONAL COMPATIBLE SOFTWARE
This is a software program or set of programs, that can record and preserve digital records and communicate directly with HMRC. Packages like Sage (v24 or later), Xero and QuickBooks, for example, are classed as functional compatible software. If you are already using them to file your VAT return direct to HMRC then you are MTD compliant as long as you adhere to the rules of processing and retaining data. A list of all software solutions that have been tested by HMRC can be found on the HMRC website by searching “MTD Compatible Software”. However, you may find it easier just to ask your provider.
• DIGITAL RECORDS
These are software programs that are capable of recording and preserving digital information but do not have all the attributes of functional compatible software like communicating directly to HMRC. For many businesses, this may be a combination of bespoke accounting ledgers, legacy accounting systems and spreadsheets. To be MTD compliant, the information stored in these digital records needs to be shared using Digital Links.
• DIGITAL LINKS
These are the means to transfer information electronically between software programs, applications or products without any manual influence. The days of ‘cut and paste’ are no longer allowed in the new MTD landscape. Digital links can be anything from an excel formula to complex API’s.
API (APPLICATION PROGRAMMING INTERFACE)
This is like a pipe between two software solutions that allows data to pass between them both without human intervention. It is via this ‘pipe’ that HMRC requires you to share your VAT information with them from April 2019 onwards. If your accounting system is not API compatible you can use Bridging Software.
• BRIDGING SOFTWARE
This is a tool that can be used to connect digital records to each other and then to HMRC’s system via an API link. There is no clear guidance on bridging software yet, nor have commercial solutions yet appeared on HMRC’S approved list, although we understand a number of suppliers are going through tests with HMRC.
WHERE IS YOUR BUSINESS NOW?
Your firm may be in one of the following camps:
• LEGACY OR BESPOKE ACCOUNTING SYSTEMS
If you use this type of system, then you probably have a lot of work to do. If you have an accounting system that can store digital records but cannot send information directly to HMRC you have two choices:
– Firstly, depending on how critical your systems are for running your business, you could change your system to compatible software. There are benefits to doing this, including the potential for quicker information and greater analytics to help better manage your business. On the downside, it will require some change, investment and time.
– If your software is mission critical to your business and/or you do not want to replace it, you can use Bridging software. This will involve getting information out of your systems (digitally) into a central processor and then sent to HMRC via an API.
• COMPLEX ACCOUNTING AND / OR VAT POSITION
HMRC have accepted that not all functional compatible software will be able to deal with complex VAT positions like MDP’s or even some ABS’s. You need to take action to find a solution and have several choices.
– Firstly, you could extract your VAT information via digital links to a central processor, undertake your calculations using formula only and use bridging software to share this with HMRC.
– Alternatively, if you have functionally compatible software, you can undertake your calculations in your spreadsheets above then upload the required adjustments back into your system and send to HMRC from there.
• YOU USE AN OLD VERSION OF A SOFTWARE SYSTEM THAT IS NOT MTD COMPLIANT
In this instance you can either upgrade to a later version of your software to become compliant, you could switch to another software provider if you are looking for a new way to manage your business or you can go down the bridging software route. All the above options require that you do something.
• YOU ALREADY USE MTD COMPLIANT SOFTWARE
You are compliant, and any changes should be minor but you should still make sure you are ready for the change.
OTHER THINGS TO CONSIDER
You need to think about the consequences of having “open-book” records with HMRC. Many firms run manual and/or offline invoicing which generates gaps in invoice numbers and chronology issues. You should also review your policies on “pro-forma” invoicing and “credit-notes” as well as your VAT treatment of disbursements and/or recharges. This will all be laid bare to HMRC.
Please speak to your tax adviser and your IT system provider to discuss your position, or please feel free to contact us for further information