Digitization has been one of the greatest phenomena in the last decade and has revolutionized the way businesses are operated globally. One such initiative has been taken by the HMRC with respect to filing of VAT returns in the UK. With the goal of becoming one of the world’s most digitally advanced tax administrations the Making Tax Digital (“MTD”) is transforming its tax administration so that it is:
- More effective
- More efficient
- Easier for taxpayers to get their tax right
Starting from 1 April 2019, all VAT registered businesses which breech the taxable VAT turnover threshold are required to use the MTD services to maintain records digitally and use the approved software to undertaken VAT compliances (including submitting VAT returns). Only a very small number of business with complex requirement are an exception to the general rule.
Businesses with taxable turnover above £85,000 are required to follow the MTD rules even if the turnover falls below the minimum threshold subsequently. Businesses established outside the UK, which breech the threshold requirement and are VAT registered will also be required to follow the MTD rules.
Where the HMRC is satisfied of the following, businesses will not be required to follow the MTD rules:
- Business is run entirely by practicing members of a religious society whose beliefs are incompatible with MTD regulations
- It is not practicable for the business to to use digital tools
- Business is subject to an insolvency procedure
Maintenance of digital records
All VAT registered businesses are required to maintain and preserve certain records and accounts. Under the MTD regime, parts of these records are required to be kept digitally and maintained on functionally compatible software. A functional compatible software is a software program, or set of software programs, products or applications, that are able to:
- Record and preserve digital records
- Provide to HMRC information and returns from data held in those digital records by using the API platform
- Receive information from HMRC via the API platform
To support VAT returns you make, the functional compatible software must contain:
- The total output tax on sales
- The total tax on acquisitions from other EU member states
- The total tax to be paid on behalf of suppliers under the reverse charge procedure
- The total input tax on business purchases
- The total input tax allowable on acquisitions from other EU member states
- The total tax that needs to be paid or reclaimed following a correction or error adjustment, and
- Any other adjustment allowed or required by VAT rules
The data collected by the HMRC is used for the purposes of undertaking assessments and collection of tax and duties, the payment of benefits and the prevention and detection of crime.
While it may prove to be difficult for some businesses to implement the MTD rules right away, there are several user-friendly options for VAT compliance and filing software available in the marketplace today. Businesses could benefit greatly from simplifying and digitizing their VAT compliances and focusing their attention and expertise to other strategy-based activities. This move could be highly beneficial to both businesses operating in the UK and the HMRC equally.