Making Tax Digital for VAT

26 January 2018

As if Brexit was not a significant enough event for British businesses to have to deal with in April 2019, HMRC are introducing Making Tax Digital for VAT (MTD for VAT).  With effect from 1 April 2019, businesses with a turnover above the VAT threshold (currently £85,000) will have to:

  • keep their records digitally (for VAT purposes only); and
  • provide their VAT return information to HM Revenue and Customs (HMRC) through Making Tax Digital (MTD) functional compatible software

In preparation for the introduction, HMRC have published drafts of the VAT Regulations, explanatory memorandum and VAT Notice and there is a short period of public consultation which closes on 9 February 2018.

Under MTD for VAT, software will be used to maintain the relevant digital records, calculate the VAT return figures and to submit the return electronically via an Application Programme Interface or ‘API’ for short.  Importantly, there is a requirement that there “must be a digital link” between all software used by the organisation for its VAT compliance.  The complete set of required digital records do not all have to be in one piece of software as long as there is a digital link between the different elements of the return. 

So what does this mean for the many businesses that either prepare their VAT returns using Excel or download information into Excel in order to prepare supplementary calculations such as the partial exemption adjustments?  In practice, it means that there will need to be “functional compatible software” which either:

  • links the spreadsheet to HMRC’s portal via an API; or
  • links back to the main accounting platform which will then submit the information via an API.

Section 3.2 of the Draft Notice advises that HMRC have a list of software businesses can use to submit their VAT Return via an API.  However, this list is currently blank.

 

Cloud Based Accounting

At AAB, we have been highlighting the benefits of Cloud Based Accounting software such as Xero or Quickbooks Online for some time.  As MTD for VAT comes nearer, more businesses will embrace cloud based accounting software.  Importantly, not only will these packages provide the web API needed to report to HMRC, with the range of available software add-ons that are available to integrate with Xero and Quickbooks, the ability to tailor the functionality of your accounting software to meet the specific needs of your business is invaluable.

Whilst choice is a great thing, picking your way through all the different add-ons can be a real headache. The online reviews of the add-ons can be a good starting point to narrow down the selection. Most accountants and professional advisers can’t afford the luxury of constant experimentation so finding an accountant who has relationships with the add-on software developers is key.

If you have any questions about MTD for VAT, please contact Alistair Duncan (alistair.duncan@aab.uk).  If you would like more information about cloud accounting and the available add ons, please contact Steve Mitchell (steve.mitchell@aab.uk) or your usual AAB contact.

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