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Changes to VAT returns from 1 April 2019 – are you ready?

8 October 2018

What are these changes and why are they being introduced?

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. These changes will mean that VAT returns starting on or after 1 April (no joke) will be subject to the new rules.

The changes are referred to as ‘Making Tax Digital’ (MTD). It 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 is 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 charities and not-for-profit organisations are complying with the new rules.

Do these changes apply to charities?

There is an exemption for charities who have never exceeded the taxable income registration threshold (currently £85,000). However, exceed the threshold and you are obliged to use the MTD processes. And once you are obliged to submit using MTD that obligation will remain – a club you cannot leave while you are registered or able to register for UK VAT.

There is some good news insofar as where VAT recovery apportionment calculations are undertaken, only the totals need to be included in the digital link – not the underlying calculation.

Penalties?

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 focuses 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 that will allow submission. These are being developed and there are a number of software providers offering suitable solutions.

Can we help?

If you would like to discuss this or any other matter affecting your charity, please do not hesitate to contact your usual UHY contact, David Rawcliffe or Matthew Granger.

Alternatively, if you would like to read more charity focused blogs please click here.