As of July last year, the government’s ambitious programme to digitise the UK taxation system gained a new poster child in the form of VAT.
Incoming financial secretary to the Treasury Mel Stride yielded to arguments that April 2019 was too early to introduce Making Tax Digital (MTD) in full and pushed the requirement for MTD for income and corporation tax back to 2020. The enormity of the task of bringing UK VAT-registered businesses in line with the new requirements by the April 2019 deadline still looms large, however.
In mid-December, the government published its draft legislation for making VAT digital. The Value Added Tax (Amendment) Regulations 2018 state that from 1 April 2019, VAT-registered businesses will be required to keep and preserve digital records and provide VAT returns using software compatible with the HMRC’s systems.
The draft legislation is one staging post in an ongoing conversation between government, HMRC and the profession, and there is evidence HMRC has listened, says Anita Monteith, technical lead and senior policy adviser in ICAEW’s Tax Faculty. The draft legislation reflects some of the Institute’s concerns, she says, including issues around the flat rate scheme and retaining the extra seven days for paying VAT. “Where they haven’t heard us is on the issue of mandation,” she says. “ICAEW totally supports the move to digital, but businesses will know for themselves when it is best to make that step.”
In essence, MTD hinges on establishing a viable doorway between the VAT accounting system that a business might install and run and the HMRC’s collection portal. Or, as the legislation terms it, MTD requires “functional compatible software… the functions of which include: recording and preserving electronic records in an electronic form; providing information to HMRC from the electronic records and returns in an electronic form and by using the API platform; and receiving information from HMRC using the API platform in relation to a person’s compliance with obligations under these regulations.”
The draft legislation states that information may only be submitted to HMRC via application programming interfaces (APIs). These can be embedded within accounting software, bridging software or API-enabled spreadsheets. In an addendum, HMRC has stated that the complete set of digital records to meet MTD requirements do not have to be held in one piece of software. Providing there is a digital link between software, records can be stored across different compatible digital formats.
VAT’s quarterly reporting structure may well be the feature that made it an attractive candidate for MTD’s first iteration. “Given there is already a mechanism for quarterly reporting on VAT, the assumption seems to have been that MTD will be a small jump for business,” says Monteith. “In fact, there is a vast leap, including the need for a digital accounting system.”
There is a concern that smaller VAT-registered businesses may be put in the position of buying software they have little understanding of. The same applies to yet-to-be VAT-registered businesses. Once they cross the VAT registration threshold, they have little time to get their administration and reporting up and running. “I am concerned that people will buy software too quickly, software unsuitable for their business,” says Monteith.
While the profession may be acutely aware of MTD and the 2019 deadline, the same cannot be said for taxpayers. “At this point few if any taxpayers are prepared for MTD,” says John Forth, indirect tax partner at RSM. “While larger, more sophisticated taxpayers with in-house tax teams are typically aware of MTD, our experience is that to date relatively limited resource or effort has been allocated to considering the impact this will have upon their VAT accounting from 1 April 2019. In terms of smaller businesses or those with no in-house tax resource, basic awareness of MTD is limited or more often non-existent,” he says.
The danger of non-compliance due to this low awareness should not be overlooked. Androulla Soteri, tax development manager at MHA MacIntyre Hudson, says: “MTD has changed course so many times now that I think it’s a bit of a case of ‘the boy who cried wolf’: the profession is at the point where it doesn’t quite believe it’s going to happen, and some smaller practitioners may be taking the attitude that until they know what really is going to happen, there is not much they can do to help clients. This is a danger area that HMRC should be addressing with software suppliers.”
A common response to the draft legislation has been the lack of detail on how exactly VAT-registered businesses will interface with HMRC. Alex Millar, senior VAT consultant at Leeds and York-based accountancy practice Garbutt + Elliott, says the early pilot for MTD for VAT, which started last year, was on a very small scale.
“A larger scale pilot is due to commence in spring 2018 and this will provide a clearer idea of the impact the new system will have on businesses,” he says.
What’s more, HMRC has yet to confirm which providers it is working with, according to Soteri. “Up until July last year, software houses were working on developing their product to meet the requirements of quarterly reporting for income tax obligations. That’s quite a different spec to the one they have now regarding VAT. Despite the recent detail released by HMRC, software companies will be facing considerable difficulties delivering packages that are adequately tested by the necessary time limits. Most businesses like to beta test and parallel run new systems before relying upon them, especially when it comes to their finance function.”
There is an additional complexity. The 1 April 2019 implementation date suggests companies only need worry about the first quarter falling after that date. But companies are unlikely to want to introduce new software part-way through their accounting period – a practicality that shortens timeframes still further.
“Time is becoming tight. If the timetables are to be adhered to, there must first be more clarity from HMRC around the rules. HMRC then has to work rapidly with software suppliers to enable them to develop adequate updates and systems. If this does not happen, many accountants will find April 2019 a very testing time as they try to fix the problem,” says Soteri.
According to HMRC’s own research, only 11% of businesses currently use software compatible with the MTD requirements, so few would be in a position to go live at the press of a button. HMRC has said it will accept use of spreadsheets so long as they have APIs in place that push numbers from those spreadsheets to the HMRC system. It’s an important concession, but it overlooks the complexity of VAT accounting and reporting. “Businesses that are partially exempt often use spreadsheets in order to compute their VAT liability,” says Soteri. “The information on these spreadsheets can represent a significant departure from what is processed into any booking software, as the calculations are complex and can vary from return to return. This is an area where the recent concession by HMRC regarding the use of API spreadsheets in conjunction with software is likely to be exploited.”
Given the complexities, accountants in practice hope that HMRC will keep its promise of a soft landing in terms of MTD compliance. “I would expect HMRC to take a light touch, possibly until around 2020, in relation to applying penalties, then take a tough approach,” says Millar. “However, this is not guaranteed and businesses should prepare on the basis that penalties will apply from 2019.”
The altered roadmap for MTD may have pushed income tax and corporation tax out of the near term, but making VAT the frontrunner for this initiative brings in one massive and unavoidable legislative clash in the form of Brexit on 29 March 2019. Practising accountants will doubtless regard the volume of preparatory work that HMRC faces to ensure both MTD for VAT and the system for new Customs/VAT rules are up and running by that date as all but unsurmountable.
“Even with a soft Brexit, history has told us HMRC might not be able to achieve a work around for just MTD for VAT by then,” says Soteri. “Real Time Information (RTI) is a case in point – initially, everything seemed to work well but a lack of testing has led to a lot of problems that are still being ironed out.”