Advice from Deloitte on how to prepare your VAT accounting and reporting systems.
1 March 2018
In 2015, the Government announced its vision to modernise the UK taxation system through its Making Tax Digital scheme. The intention is also to reduce the £9bn tax gap due to error and failure to take reasonable care, and to eliminate rekeying (i.e. the manual entries of figures into HMRC’s online system).
Making Tax Digital for VAT goes live on 1 April 2019 and will mean changes to VAT accounting and reporting systems. We have set out further details of what this will entail below, but we advise that you review your existing systems now in order to identify the scope of any changes which may need to be made in order to comply from next year.
What is Making Tax Digital?
HMRC has outlined its aims via the four ‘foundations’ of Making Tax Digital:
Better use of information – this will mean taxpayers will not have to give HMRC information that it already has (or is able to get elsewhere from other Government departments, for example). Digital tax accounts will mean that taxpayers can see the information that HMRC holds and check at any time that their details are complete and correct. HMRC will use this information to tailor the service it provides, according to each taxpayer’s individual circumstances.
Tax in real time – HMRC will collect and process information affecting tax as close to real time as possible, to help prevent errors, and stop tax due or repayments owed building up.
A single financial account – at the moment, most taxpayers cannot see a single picture of their liabilities and entitlements in one place. By 2020, customers will be able to see a comprehensive financial picture covering a range of taxes in their digital account.
Interacting digitally with customers – taxpayers (and their agents) will be able to interact with HMRC digitally, and at a time that suits them. Digital record keeping software will be linked directly to HMRC systems, allowing taxpayers to send and receive information directly from their software.
What you need to know
From April 2019, housing associations (and all other businesses within the scope of Making Tax Digital) will need to keep their VAT records digitally using approved Making Tax Digital functional compatible software. This is a software program which can connect to HMRC systems via an Application Programming Interface (API).
The software – which will include spreadsheets – must be able to:
keep records in a digital format
preserve digital records in a digital form
create a VAT return from the digital records (and be able to provide HMRC with this information digitally via an API)
provide HMRC with VAT data on a voluntary basis
receive information from HMRC.
As is currently the case, VAT records will still need to be saved for six years.
We understand that initial implementation of Making Tax Digital does not include a requirement to maintain partial exemption calculations in the digital software.
HMRC has acknowledged that the majority of businesses use spreadsheets as a fundamental part of preparing VAT returns and that there is currently no software available that could perform all the VAT calculations required. HMRC’s concern is that there should be a digital pathway and that VAT data should not be re-keyed as part of the compliance process.
How to prepare
As a starting point, you will need to look at your full VAT process, and in particular, where the data for this comes from, which systems are used and how this information is adjusted and consolidated. This end-to-end flow of information should be digital and capable of being audited. Some organisations may be doing this currently by downloading reports and files, but where this information is being manually entered into spreadsheets or tax compliance software, the impact on automating this process should be considered. It is likely that a digital audit trail from the submission of information to the underlying accounting records may be required, and potentially the submission of the underlying documents.
We have been involved in a number of consultation meetings with HMRC and we continue to work closely with them to ensure the concerns of our clients are addressed, as well as facilitating a smooth transition to the new requirements.