If you’re an overseas business with activities in the UK, you may have heard that the UK Government plans to introduce Making Tax Digital next year. What do you need to know and how will this impact you? Here is a brief summary to cover all the major points: What is Making Tax Digital (MTD) for VAT? Announced in the 2015 UK budget, it is a key part of a plan by HM Revenue and Custom (HMRC) to bring the UK into the digital age, and create a world leading digital tax system. Part of the aim of MTD is to reduce the “Tax Gap” – this is the difference between the revenue HMRC expects to collect, and the actual amounts collected. This in part can be attributed to taxpayers where, for example, they are not taking reasonable care, making errors or through VAT avoidance. HMRC hopes to achieve this reduction by digitally linking tax returns to their constituent transactions, either via accounting software developed to directly link with HMRC’s systems (known as API enabled software), or via “bridging software” designed to link client spreadsheets with HMRC. Who does it cover? MTD will eventually cover all VAT registered individual taxpayers and businesses, but for now MTD is compulsory for those who must be registered for UK VAT (i.e. their turnover is above the registration threshold). Businesses with turnover below the threshold can opt to use the MTD rules. Therefore, if you are an overseas business (meaning a business that has no permanent or fixed establishment in the UK and registered for VAT in the UK) that makes taxable supplies in the UK of £85,000 or more, MTD will apply to you. When does it come in? MTD will generally be compulsory for the first VAT return period commencing on or after 1st April 2019. However, overseas businesses (as described above) are amongst a number of businesses which are subject to a delayed start date. Others include VAT groups, trusts and those using certain schemes, all of which will not need to comply with the MTD regulations until their first VAT return period starting on or after 1st October 2019. What does it involve? If your overseas business is required to be MTD compliant, you will be required to digitally submit your VAT returns to HMRC. You will no longer be able to do this via HMRC’s Government Gateway after 1 October 2019. Therefore, you will need to move to digital record keeping – if you use API enabled accounting software (or your software provider is developing this) then your transition should be relatively simple, though you will need to ensure the information you have input into the software is accurate and MTD compliant. If you prepare your return on a spreadsheet, then this will be your digital record and you will need to obtain and use “bridging software” which digitally links your spreadsheet to HMRC. You can also use “bridging software” where your accounting software is not API enabled, by exporting the VAT return or transactions direct from the software to a spreadsheet. The spreadsheet can also be used to make VAT adjustments such as Partial Exemption, or Capital Goods Scheme adjustments. It should be noted that MTD does not replace the existing requirements to keep tax records for 6 years (or 10 years if you use the MOSS service). How might an overseas business approach this? Although the deadline is still some months away, overseas businesses should start to prepare for MTD now, to ensure that suitable software and processes are well established and any teething problems are addressed, well ahead of October 2019. If you use accounting software then the question to ask yourself is: Is my existing accounting software provider developing their system to link with HMRC by the October 2019 deadline? If the answer to the above is yes, then your main concern is ensuring all the necessary information you have input into your accounting system conforms to MTD legislation. However, if the answer is no, or you don’t use accounting software, then you need to act:
- As an absolute minimum you will need to prepare your return using a software spreadsheet – the days of writing your return on a piece of paper are now over!
- If you use accounting software, but it isn’t going to be compliant with MTD then the good news is you can continue to use it, provided it can export your VAT return or the taxable transactions direct to a spreadsheet to preserve its digital link. Copy and paste, or manually transferring figures from your system to a spreadsheet breaks the digital link, and are therefore not allowed.
Whichever of 1 or 2 applies, you will need to purchase bridging software to enable you to submit your return to HMRC. Contact our tax experts for more details and support on getting your business MTD compliant. Author: Robert Facer, Menzies LLP, HLB UKClick here to learn more.