13 November 2018
There are two major changes to the VAT system on the way – both around April fools day
The first is a fundamental change to the VAT return system – the ability to submit VAT returns through the government gateway will no longer be available to most organisations. HMRC expect this change to raise an additional £1bn in revenue for the Treasury by 2020 – will you be contributing to this amount?
The second change is the UK’s withdrawal from the EU. While withdrawal seems certain the actual implications are not – we are waiting to establish exactly what the UK’s withdrawal from the EU will mean for cross border trade and VAT accounting.
Leaving the EU
HMRC have finally published guidance on the likely consequences if the UK leaves the EU without a deal. The guidance is as expected – the UK will likely be obliged to trade under World Trade Organisation rules and no longer benefit from simplifications currently available. The free movement of goods within Europe will exclude movements to and from the UK.
HMRC guidance can be found following this link.
Businesses will need to ensure they can continue to trade, collect any tax due, be tax compliant and avoid any penalties that could apply.
For example, if you currently use MOSS this may no longer be available and you will need to consider registering in another member state for the scheme – if you do not then you will be liable to register in all member states where you have a customer.
We are working with a number of clients on planning for this scenario – which is only a few months away. Bearing in mind the implementation time (for example, registration lead times, invoicing changes, et al) this is a tight deadline for a fundamental change to tax compliance models for many clients.
What steps should I take?
If you undertake any trade in other EU countries you need to consider what the implications of a no deal exit will be and be ready long before the deadline crystallises.
What is Making Tax Digital (‘MTD’)?
Mandatory changes come into effect on 1 April 2019 that will fundamentally change the VAT return system. You will no longer be able to submit returns through the government gateway and must use software that will allow digital submission to HMRC. The changes will mean that VAT returns starting on or after 1 April will be subject to the new rules.
MTD is a change designed to reduce tax errors and produce additional revenue of £1bn by 2020 for the Treasury.
The MTD software must be able to –
- Record and preserve digital records;
- Provide HMRC with information and returns from data held in those digital records; and
- Receive information from HMRC via their Application Programming Interface (‘API’) Platform
The software must have digital links so that there is a record of the ‘digital journey’ of the data. HMRC are allowing a ‘soft landing’ on digital links with full requirements needed to be met by 31 March 2020. This is a legal obligation.
This is one of the most significant changes to the VAT return system. It is an opportunity to streamline VAT reporting and remove the possibility of transposition errors but requires some work to ensure organisations are complying with the new rules.
HMRC have announced a deferment of implementation for some VAT registered organisations. This is restricted to specified bodies. HMRC have extended the deadline for MTD for VAT by six months for the following organisations:
- ‘Not for profit’ organisations that are not set up as a company,
- VAT divisions
- VAT groups
- those public sector entities required to provide additional information on their VAT return (Government departments, NHS Trusts),
- local authorities
- public corporations
- traders based overseas
- those required to make payments on account, and
- annual accounting scheme users.
One important thing to bear in mind is the interaction with penalties for late submission and payment. These are based on a flat percentage of the tax due with no concept of proportionality. A recent case saw a penalty of £300k confirmed – the taxpayer paid one day late.
It is hoped HMRC will apply a light touch to penalties when the system is introduced. However, even if they do this would be finite and HMRC focus on reasonable care when considering penalties, so every VAT registration needs to be working to this standard and able to evidence appropriate care.
What steps should I take?
If you prepare returns using an accounting package then your provider should be developing software to ensure compliance. If you use a spreadsheet then you are likely to need some bridging software which will allow submission. There are a number of software developers offering suitable low cost solutions.
Given HMRC expect this change to produce more revenue a review of your VAT accounting arrangements might be worth consideration.
Can we help?
If you would like to discuss your circumstances, please do not hesitate to contact me, an Indirect Tax Partner in London or your usual UHY contact.