HMRC has published draft secondary legislation in respect of Making Tax Digital (MTD) for VAT in the form of regulations, a draft explanatory memorandum and draft VAT Notice, for public comment.
Finance (No.2) Act 2017 included legislation allowing the introduction of Making Tax Digital for VAT from 1 April 2019. The Primary legislation at s62 covers ‘Digital reporting and record keeping for VAT’, which updates Schedule 11 of the VAT Act 1994, allowing for the introduction of Making Tax Digital for VAT.
The proposed secondary legislation would make changes to the VAT regime, requiring businesses with taxable turnover above the VAT registration threshold to keep and preserve digital records and provide VAT returns using compatible software.
The Draft Regulations:
The draft regulations provide for the following:
- Records must be preserved in functional compatible software, however this requirement can be discharged by preserving them or the information in them in any form or by any means; subject to any conditions or exceptions specified in writing by HMRC.
- The electronic account must be kept and maintained using functional compatible software. The functional compatible software must take a form approved by HMRC.
The information to be kept in an electronic form which includes:
- Taxpayer details including any accounting schemes used
- Time and value of supply
- VAT rate used
- Details of adjustments and corrections to the VAT account
- The proportions of the total of the VAT exclusive value of all outputs for the period which are attributable in each case to standard rated, reduced rated, zero-rated, exempt or outside the scope outputs.
Exemptions for persons where:
- They are practising members of a religious society or order whose beliefs are incompatible with the use of electronic communications
- An insolvency procedure as described in any of paragraphs (a) to (f) of section 81(4B) of the VAT Act 1994 is applied
- HMRC are satisfied that it is not reasonably practicable to make a return using a compatible software return system for reasons of disability, age, remoteness of location or any other reason.
- For any month (“the current month”), the value of a taxable person’s taxable supplies in the period of one year ending with the month before the current month was less than the VAT threshold.
- An election for an exempt person to opt not to be exempt and to withdraw such election for later accounting periods.
The draft VAT Notice:
The VAT notice is for guidance only except that parts of the notice will have the force of law under the regulations, and these are the following:
- If a set of compatible software programs is used there must be a digital link between the pieces of software.
- If you account for VAT using the flat rate scheme you do not need to keep digital records of your purchases unless they are capital goods where input tax can be claimed.
The notice also includes information about voluntary updates and sending supplementary data to HMRC.
Addendum to the VAT notice:
HMRC has also made available a proposed Addendum to the draft VAT notice, setting out how businesses could use compatible software alongside spreadsheets to produce VAT returns. This includes the following:
- HMRC anticipates a soft landing period (without application of record-keeping penalties) in the first year to allow businesses, in certain circumstances, extra time to update legacy systems to be fully compliant.
- The transfer of data from the mandatory digital records through to receipt of information by HMRC must be digital. Digital transfer includes options such as XML import/export, macros or linked cells, but does not allow manual transfer or transposition of data. Whilst spreadsheet can be used API enabled bridging software must then be used to submit data to HMRC.
- Adjustments, such as partial exemption, can be calculated separately outside the digital records of the organisation and transferred in digitally or manually.
- The complete set of digital records to meet MTD requirements do not all have to be in one place; digital records can be kept in a range of compatible digital formats.
Comments on any of the documents should be sent by email to: by 9 February 2018.
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