Consultation outcome

Making Tax Digital for VAT: legislation overview

Published 13 September 2017

On 13 July 2017, the Financial Secretary to the Treasury and Paymaster General announced that Making Tax Digital for VAT will come into effect from April 2019. From that date, businesses with a turnover above the VAT threshold (currently £85,000) will have to:

• keep their records digitally (for VAT purposes only), and
• provide their VAT return information to HM Revenue and Customs (HMRC) through Making Tax Digital (MTD) functional compatible software

He also confirmed that MTD will be available on a voluntary basis to other businesses, for both VAT and Income Tax.

Finance Bill 2017 published on 8 September 2017 includes legislation allowing the introduction of Making Tax Digital for VAT. This primary legislation will give the commissioners of HMRC the powers to introduce regulations, which will set out the detailed requirements that businesses will have to meet. The aim of this document is to provide an overview of the proposed legislation.

Primary legislation

Clause 62

Digital reporting and record keeping for VAT, included in the pre-Budget Finance Bill 2017 updates the powers contained within Schedule 11, VAT Act 1994 (administration, collection and enforcement), allowing the introduction of Making Tax Digital for VAT.

The clause will retain what is currently in place with regards to keeping and preserving records, the keeping of accounts, and the making of returns. But it introduces new powers to make regulations about the submission of information from VAT registered businesses. In addition, for those businesses with turnover above the VAT registration threshold, the clause introduces new powers allowing the commissioners of HMRC to make regulations that require a business to keep and preserve certain records digitally.

Specifically, Clause 62:

a) Gives the commissioners of HMRC powers to make regulations requiring the submission of information relating to VAT (VAT Act 1994, Schedule 11 Paragraph 2).

b) Gives the commissioners of HMRC powers to make regulations that specify the form in which records are kept and preserved (VAT Act 1994, Schedule 11 Paragraph 6 and 6A).

c) Where regulations are made that require records to be kept and preserved digitally, gives the commissioners of HMRC the powers to specify how digital records are kept and the conditions that must be complied with.

d) Where these powers are used to require records to be kept and preserved in a digital format, provides an exemption for businesses with a turnover below the VAT registration threshold.

e) Ensures that, once a business is required to keep digital records, this requirement remains in place even if that businesses turnover falls below the threshold and that person remains registered for VAT.

f) Gives the commissioners of HMRC the power to vary the exemption provisions, in the case of transfers of a going concern, and add further exemptions in the future.

g) Gives a right of appeal against HMRC decisions about the application of regulations relating to VAT requiring the use of digital communications or digital record-keeping.

h) Ensures that regulations providing for digital record keeping can’t come into force before 1 April 2019.

Sanctions for failure to keep or preserve digital records for VAT purposes will correspond to the existing penalties for failure to keep or preserve records for VAT purposes.

Secondary legislation

Application

The MTD requirements for VAT will take effect from 1 April 2019.

The government will publish and consult on draft VAT regulations to be made under the powers above. The intention is to have made the necessary VAT regulations no later than April 2018, giving businesses and software developers at least 12 months to prepare before the VAT requirements come into force.

Scope

The MTD requirements for VAT will apply to any VAT registered business with a taxable turnover over the VAT registration threshold.

This requirement will remain, even if they fall below the threshold at a later date. The requirement will cease upon deregistration.

Exemptions

The exemptions that already apply to electronic VAT returns will be extended to cover digital record keeping requirements. A business:

• who the commissioners are satisfied is a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications
• to whom an insolvency procedure as described in any of paragraphs (a) to (f) of section 81(4B) of the Act is applied
• for whom the commissioners are satisfied that it’s not reasonably practicable to make a return using an electronic return system (including any electronic return system that that person is authorised to use) for reasons of disability, age, remoteness of location or any other reason is not required to make a return required by regulation 25 using an electronic return system

There will be a right of appeal against HMRC refusal of exemption.

In addition to the above, the regulations will provide that a taxable person is exempt from the MTD requirements for any month (‘the current month’) if:

• the value of the person’s taxable supplies, in the period of one year ending with the month before the current month, was less than the VAT threshold, and
• the person was not subject to those requirements in the month before the current month

A taxable person with turnover below the threshold (or a business which is insolvent) may elect for the relevant exemption not to apply. A business making such an election must do so before the first day of any return period that they wish for the exception to the exemption to apply. This is to be made by notice to HMRC and specify the date it will run from.

A business may withdraw an election at any point by notice to HMRC. They must include the date they are withdrawing the exception from. This can’t be a date in the past. The obligations will cease from the start of the next VAT return period after that date. If, at any point following the election being notified to HMRC they are no longer exempt they may no longer withdraw the election.

Third-party software

The regulations will provide that a business is in scope for MTD must use functional compatible software to meet the new requirements.

Functional compatible software means a software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API). The functions of the compatible software must include:

• keeping records in a digital form as required by the regulations
• preserving digital records in a digital form as required by the regulations
• creating a VAT return from the digital records held in functional compatible software and providing HMRC with this information digitally
• providing HMRC with VAT data on a voluntary basis
• receiving information from HMRC via the API platform in relation to a relevant entity’s compliance with obligations under the regulations

Digital record-keeping

The regulations and HMRC notices or directions issued under them will specify details of the business’s obligations to keep and preserve VAT records digitally. Businesses will need to preserve digital records in functional compatible software, for up to 6 years.

Following deregistration, a business must preserve their records for up to 6 years. For businesses in scope for MTD, those records that relate to the period between mandation and deregistration must be preserved digitally for up to 6 years.

Content of digital records

The regulations will specify the information a business needs to keep and preserve digitally, and will include:

• business name, principle place of business and VAT registration number — this ‘designatory data’ will also include information about which VAT accounting schemes they use
• the VAT account that each VAT registered business must keep, by law — the VAT account is the link — the audit trail – between primary records and the VAT return
• information about supplies made and received

See Annex 1 for further details.

In certain circumstances, the regulations may permit HMRC to use notices or directions to define additional or different requirements, for example:

Retail schemes

Retail scheme users will, by HMRC notice or direction, be permitted to record electronically sales transaction data based on daily gross takings, rather than recording details of each sale.

Flat Rate Scheme

Businesses eligible to use the Flat Rate Scheme account for output VAT as a specified percentage of turnover, and don’t claim input VAT on most expenses.

Scheme users keep records of sales but the only records of purchases they must keep are those relating to capital goods with a VAT inclusive value of £2,000 or more. Digital record keeping requirements for flat rate scheme users will mirror current record keeping requirements.

VAT returns

Businesses within the scope of MTD for VAT will be required to submit their VAT returns using their functional compatible software.

The information contained with the VAT return will be generated by pulling information from the digital records. This information will contain as a minimum the 9 boxes required for the VAT return, but can also contain a specific data set of supplementary information — all of which will be pulled from the digital records.

In the MTD consultation response published on 31 January 2017 we envisaged that the deadline for submissions of information for Income Tax and VAT would be aligned. For the time being, however, there will be no change to statutory VAT return or payment dates. We will reconsider the position if and when Making Tax Digital for Income Tax becomes mandatory.

Monthly, non standard and annual returns

Businesses submitting monthly returns (whether directed to by HMRC or doing so voluntarily), will continue to do so. Similarly businesses submitting non standard returns can continue to do so.

The VAT annual accounting scheme will be retained with the current conditions. All of the above, if not exempt from MTD, will be required to keep digital records and submit their VAT returns through functional compatible software.

Periodic updates (voluntary)

Businesses will be able to submit VAT information more frequently than their VAT return obligations require. The regulations will provide for the submission of this information on a voluntary basis (‘voluntary update’).

We expect a voluntary update outside of the VAT Return cycle to be used mainly when a business is also providing an Income Tax update. But it could also be used for example update HMRC about a change of circumstances (changes to ‘designatory data’).

A voluntary update won’t discharge the VAT return obligation and won’t create a liability that must be paid or trigger a repayment.

Supplementary data

HMRC believes that businesses and HMRC could benefit from the submission of supplementary data. While the simplicity of the ‘9 Box’ VAT return has advantages for businesses in terms of reduced administrative burdens, because HMRC receives no information about how the figures in the return are arrived at, it is difficult for HMRC to target its ‘downstream’ compliance activity at customers most likely to be non-compliant.

HMRC will permit, and functional compatible software will provide for, the voluntary submission of supplementary VAT data as part of a VAT return or a voluntary update.

The legislation will describe the information that would be required but, broadly, this will be summary totals of the information required to be kept and preserved electronically as detailed in Annex 1.

This will allow HMRC to test with businesses the extent to which they and HMRC can benefit from such supplementary data.

Amendments to previously submitted returns and updates (error corrections)

The existing error correction rules will apply where a taxable person needs to amend their VAT accounting records.

Corrections to previously submitted VAT Return updates will continue to be made through the current processes (SI 1995/2568 Reg 34, 35, VAT Notice 700/45). Non-deliberate errors that are below the reporting threshold can be adjusted on the next VAT Return, using functional compatible software, as long as they are within the 4 year limit. Other errors will need to be reported through the VAT652 (Notification of errors in VAT returns) procedure, but HMRC is considering options for provision of non-mandatory electronic channels for submission of form VAT652, including the potential for provision via functional compatible software.

Where a taxable person needs to amend an update that is not accompanied by the legal declaration required for the VAT return, they can do so by simply supplying the corrected or updated information to HMRC using their MTD functional compatible. Similarly, if a taxable person needs to amend supplementary VAT data provided voluntarily, they can do so by supplying the corrected or updated information through the MTD functional compatible. These changes won’t be subject to behavioural penalties.

Commencement and cessation

Businesses in scope for MTD will need to keep their records digitally, using approved MTD functional compatible software, from 1 April 2019.

The functional compatible software will create the return from the digital records, so businesses will need to start keeping digital records and then submit VAT Returns via functional compatible software for return periods starting on or after 1 April 2019.  

Annex 1: electronic record-keeping requirements

Designatory data:

• business name
• principle place of business
• VAT registration number
• VAT accounting scheme use indicators (more than one scheme may be used for example flat rate scheme, cash accounting, retail schemes, margin schemes, partial exemption and gold special accounting scheme)

VAT account

VAT payable portion:

• total output tax due for the VAT return period
• total output tax on acquisitions from other EU member states
• total output tax on supplies received where the business is required to account for and pay on behalf of the supplier (reverse charge output tax)

VAT allowable portion:

• total input tax allowable for the VAT return period
• total input tax allowable on acquisitions from other EU member states

Adjustments:

• corrections of an error in calculating VAT payable in previous periods (SI 1995/2568 Reg 34, 35).
• adjustments to VAT payable because of an increase or decrease in consideration of a supply made in a previous period (SI 1995/2568 Reg 38)
• any other adjustments required by VAT rules. Types of adjustment include:
  • change of rate credit notes (SI 1995/2568 Reg 15)
  • adjustments for use of an approved estimation procedure (SI 1995/2568 Reg 28, 29(3))
  • retail scheme annual adjustments (SI 1995/2568 Reg 66-75)
  • partial exemption annual adjustments (SI 1995/2568 Reg 107-107F)
  • change of use input tax adjustments (SI 1995/2568 Reg 108,109)
  • capital goods scheme adjustments for subsequent intervals (SI 1995/2568 Reg 112-116)
  • bad debt relief claims (SI 1995/2568 Reg 165-172) and associated input tax repayment where consideration not paid (SI 1995/2568 Reg 172F-172J)

Only the total for each type of adjustment will be required to be kept digitally not details of the calculations underlying them.

Other information

Further information required in addition to the VAT account

Outputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope outputs.

Inputs value for the period split between standard rate, reduced rate, zero rate, exempt and outside the scope inputs.

Data for supplies made and received:

• VAT accounting date for the transactions on the invoice:
  • for traders on cash accounting scheme (or on the cash turnover method within the VAT flat rate scheme), the date of receipt or payment
  • for other traders, the time of supply for VAT purposes (or, for input tax only, the date of receipt of the VAT invoice or alternative evidence if later), this will often, but not always be the date of invoice
• the invoice total broken down into sub-totals for each rate of VAT chargeable
• the VAT charged at each rate on the invoice

Where an invoice covers several supplies, line by line input of each supply will not be mandatory, provided the VAT accounting date is the same for all of them.

Data for supplies made and received — for retailers

The changes introduced under MTD will require businesses to keep a minimum data set electronically. Retailers will be permitted to record electronically sales transaction data based on daily gross takings, rather than recording details of each sale where they account for VAT using a retail scheme.

VAT account

If the retailer is on a VAT Retail Scheme, the VAT payable portion of the VAT account should include the standard-rate and reduced-rate VAT due on gross takings for the VAT return period, as calculated by the Retail Scheme.

Supply data

Where retailers can’t reasonably record each individual retail sale, the supply data requirements above for such sales will be replace by records of daily gross takings for such sales, including:

• cash payments received for retail supplies
• the full value of non-cash (credit) retail sales at the time of supply
• details of any adjustments made to daily gross takings

Annex 2: VAT Return information

Outputs

Box 1 VAT due in the period on sales and other outputs

Box 2 VAT due in the period on acquisitions from other EU member states

Box 3 Total VAT due (Box 1 + Box 2)

Inputs

Box 4 VAT reclaimed in the period on purchases and other inputs (including acquisitions from the EU)

Box 5 net VAT to be paid to HMRC or reclaimed (difference between Box 3 and Box 4)

Box 6 total value of sales and all other outputs excluding any VAT

Box 7 the total value of purchases and all other inputs excluding any VAT

Box 8 total value of all supplies of goods and related costs, excluding any VAT, to other EU member states

Box 9 total value of all acquisitions of goods and related costs, excluding any VAT, from other EU member states