From April 2019, firms must maintain and submit VAT returns to HM Revenue and Customs digitally. Richard Little, financial services partner at KPMG, explains.
April 2019 is likely to be a busy time for businesses. Not only is the UK scheduled to have left the EU by then, there is also a fast approaching and critical deadline for one of the UK government’s cornerstone initiatives to transform the nation’s tax system.
Making Tax Digital (MTD) will see a significant wave of businesses, self-employed individuals and landlords required to update their tax obligations through accounting software.
While the challenges of Brexit are well known and have been long debated, there are still large proportions of the business community that are ill-prepared for, or even unware, of the requirements under MTD.
Quite simply, from April 2019 all VAT registered businesses with a taxable turnover more than the VAT registration threshold (currently £85,000) will have to maintain digital records for VAT and submit their VAT returns digitally.
Purpose of MTD: support VAT returns
According to HM Revenue and Customs, taxpayers making mistakes with VAT returns account for around £3 billion of the tax gap. That represents about a third of total taxpayer errors.
HMRC expects that MTD will have a positive impact on the tax gap as it should remove the mistakes that arise when VAT figures are wrongly entered because of manual intervention in the VAT return submission process. With this in mind, VAT will be the first area to come under HMRC’s focus.
What does Making Tax Digital VAT mean for financial services businesses?
Reporting VAT through MTD involves two key things:
While some businesses may well keep their records digitally, very few businesses submit their VAT returns directly from a software package. As such, MTD will require at least some changes for most VAT registered businesses. The burning questions are how much change will be required, how much will it cost, and how long will it take to implement, given the deadline is only six months away?
HMRC would like a seamless digital link from the recording of transactional data in the digital records through to the submission of the VAT return from the functional compatible software, which, arguably, sounds straightforward.
However, for some financial services businesses that already keep digital records and comply with the first requirement mentioned above, MTD may only require investment in some bridging software. This would allow the business’s software package(s) to talk to the HMRC systems and enable them to comply with the second requirement.
For other financial services businesses more action and investment may be needed, depending on how they currently arrive at their VAT return figures and how digital their current records are, if at all.
Complying with MTD may be much more onerous for some who might first need to transition to digital record keeping, potentially across multiple legacy systems. Typically, this applies to those with more complex VAT accounting requirements, such as Partial Exemption Special Methods, where some manual intervention is essential to arrive at the correct VAT figures, before submitting VAT returns digitally.
A useful clarification is that where VAT accounting adjustments require a calculation, like partial exemption, such calculations do not have to be made in software though HMRC stress more digital links should mean fewer errors. Also, mandatory digital records may be kept in different places if transfer between those places is also digital.
That said, there will be an additional year during which digital links which allow the transfer of data from one spreadsheet, software package or legacy system to the final return, while desirable, will not be mandatory and no record keeping penalties will be applied in that first year either.
Considering internal data security and external regulatory requirements
A more immediate concern for financial services is the requirement for greater clarity on security protocols in respect of the digital submission of data to HMRC.
The API required to allow VAT returns to be submitted digitally will effectively enable limited two-way data transfer between the business and HMRC.
This in itself creates inherent uncertainty for FS businesses, many of which operate under different global regulators and under different data protocols. The API will therefore need to be assessed against external regulatory requirements, as well as internal policies and procedures, particularly given the importance of maintaining data security.
The technical specifications of the API will need to be considered, which could require IT sign-off. This would result in a time, resource and a monetary cost to ensure VAT MTD compliance obligations are met while satisfying the requirements of external regulators and internal data security protocols.
What should financial services businesses do now?
At this stage, the sector can and should consider what VAT complexities apply to them, how they collect the VAT return information and how they currently submit the VAT return, to identify how much of a behavioural and accounting shift MTD will impose.
Early discussions with software providers about the software compatibility with HMRC’s MTD requirements may prove useful. The HMRC website now lists providers that have MTD products which have been tested.
And remember, VAT MTD is the first stage of HMRC’s wider tax MTD strategy; it will undoubtedly come for income tax and corporation tax further down the line. Therefore, any software investments/process changes made for MTD VAT should bear that in mind and be forward looking.
For further information, please contact Richard Little.
This article was written by Joanne Atkin and published in the October edition of Mortgage Finance Gazette.