Executive summary

On 13 July 2018, HM Revenue & Customs (HMRC), the UK Tax Authority, published its much anticipated VAT Notice 700/22 (the Notice) which explains the rules for Making Tax Digital (MTD) for Value Added Tax (VAT). The Notice explains: (i) the digital records businesses must keep; (ii) ways to record transactions digitally in certain special circumstances; (iii) what counts as "functional compatible software"; and (iv) when software programs need to be digitally linked where a combination of programs are used.

Alongside the VAT Notice, HMRC also published:

• Making Tax Digital for Business – stakeholder communications pack with information to support businesses that need to make the transition to digital VAT business record keeping and submission of VAT returns using MTD-compatible software from 1 April 2019.
• Information about suppliers who have tested their MTD API software products in HMRC's test environment and demonstrated a prototype to HMRC. This list will be updated regularly. We understand that a list of developers who have completed live MTD submissions and a full list of software choices will follow.

Detailed discussion

What are the MTD for VAT requirements?

All VAT registered businesses with taxable turnover above the VAT-registration threshold (currently £85,000) will be compulsorily required to meet the MTD requirements for their VAT obligations from 1 April 2019. Other taxes will follow at a later date but not before April 2020 at the earliest.

The MTD requirements mean that businesses will need to make sure that they store VAT records digitally, are able to submit VAT returns electronically via an APP using third-party software which meets the HMRC API specification requirements and that they can demonstrate a clear electronic audit trail and digital link from source systems to VAT return submission.

The Notice provides some clarity around issues which many businesses face including the MTD requirements, exemptions, records, functional compatible software, digital links, VAT calculations outside of software, adjustments, correcting errors and application of special VAT accounting schemes.

There remains, however, some uncertainty in terms of how to make MTD work in practice – particularly where adjustments are needed to VAT return figures prior to submission. There are also some significant points which may impact partially exempt organizations, namely that:

• HMRC has specified that the value of exempt supplies are reportable (particularly difficult in respect of some financial services)
• Partial exemption calculations fall outside of the functional compatible software requirement as an "adjustment"

Next steps

Given the long lead time required to make systems changes, many businesses are already undertaking a readiness assessment with a view to meeting the new MTD requirements. Any businesses which have not already undertaken such an analysis may wish to consider doing so now.

———————————————
CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), Reading

• Chris K Lewis
  clewis1@uk.ey.com

Ernst & Young LLP (United Kingdom), London

• Adam J Gray
  adam.j.gray@uk.ey.com

———————————————
ATTACHMENT

PDF version of this Tax Alert