Making Tax Digital – still full steam ahead?

The recent announcements around Making Tax Digital (MTD) place VAT firmly at the forefront of the programme – but where does that leave MTD for other taxes? The CIOT’s Margaret Curran takes a closer look at the challenges faced by businesses, advisers and HMRC.

Under the new MTD timetable only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes from 2019, and businesses will not be required to keep digital records or update HMRC quarterly for other taxes until at least 2020.  But does this mean that HMRC will be expecting businesses and landlords to use the next two-to-three years to get ready for MTD for other taxes?  If so, they need to get that message out widely and quickly because with the future so uncertain there is a real risk that many businesses will now put their MTD plans on the back-burner and focus their resources on more pressing projects.

Arguably they would be unwise to do so, not just because it will mean they are unprepared for mandation, which we know could be as soon as 2020, but also because increased digitalisation is likely to bring benefits to their business whether or not digital record keeping and quarterly reporting become compulsory for other taxes.

A lot depends on how quickly MTD compatible software for both businesses and agents is developed.  A very small scale pilot started earlier this year. The timetable may have changed but HMRC have confirmed that the pilot will definitely continue. Businesses (and agents) will be able to opt in and start to quarterly report on a voluntary basis as soon as their software is ready. Taxpayers and advisers should contact their software providers to find out when their MTD compliant products will become available.

A concern with the original proposals was that there would not have been time for businesses to have done a full MTD cycle of updates within the pilot, before mandation started.  Deferral allows for a much longer period of piloting and it is hoped that this will iron out a lot of difficulties before MTD for other taxes ever becomes compulsory.  The delay in timescales should also help mitigate pressures arising from the level of digital functionality available to agents lagging behind that available to taxpayers.

Testing of VAT compliant MTD software will start in late 2017 and be widened out from April 2018. Turning specifically to MTD for VAT proposals, the headline challenges for many businesses will involve the transition to digital record keeping, and quarterly reporting from that digital system. Both could be significantly different from current VAT record keeping and quarterly reporting (i.e. VAT return) requirements. It is an oversimplification to say that businesses currently quarterly report for VAT, and therefore will be able to do so for MTD.

Under MTD the proposal is for VAT returns to be filed directly through software, and not be input manually, but we know that while 99% of VAT returns are currently filed online, only around 12% are filed via software. Critically, businesses will no longer be able to keep manual records. Furthermore, the use of spreadsheets in VAT accounting is commonplace; not only to maintain the underlying records, but typically to convert the output from accounting software into figures for the VAT return, and those spreadsheets will in future need to be able to interact with software in order to meet the requirements of MTD. So the requirement to submit through software creates a challenge which the vast majority of businesses and software developers are yet to overcome.

Another challenge revolves around timing. MTD for VAT will take place at around the same time as the UK leaves the European Union, applying to VAT return periods commencing on or after 1 April 2019. Uncertainty around the VAT treatment of transactions between the UK and EU will inevitably arise, and businesses will need to both understand the tax-technical changes to the rules, and ensure that their accounting systems deal with such transactions correctly.

There are a number of other special schemes within VAT, such as Annual Accounting (AA), the Flat Rate Scheme (FRS), margin schemes and retail schemes, each of which have their own record-keeping and reporting nuances. It is understood that these schemes will be accommodated under MTD. The Office of Tax Simplification is undertaking a review of VAT, and areas within the review such as partial exemption and special accounting schemes could have an impact on MTD for VAT, although pressures on parliamentary time are likely in the short term to limit the amount of simplification measures we see.

Margaret Curran is a technical officer for the Chartered Institute of Taxation