Making Tax Digital for VAT

VAT is at the forefront of HMRC’s Making Tax Digital (MTD) plans which aim to make HMRC into a “world leading, digital tax authority”.

Robert Marchant

From 1 April 2019 all organisations with a turnover above the VAT registration threshold will have to:

  • keep their VAT records digitally
  • submit their VAT data to HMRC through compatible software, not through the HMRC online portal.

There are currently no plans to change the frequency of VAT returns or payment deadlines.  

What you need to do

HMRC have released updated guidance on Making Tax Digital for VAT. VAT procedures will need to change and you will need updated software to comply with the new requirements. View our frequently asked questions below.

Will MTD for VAT apply to me?

MTD for VAT applies to most organisations who have VAT taxable turnover in excess of the compulsory VAT registration threshold (currently £85,000) for VAT periods starting on or after 1 April 2019. Other than the threshold test, the only exemptions are for religious or exceptional grounds or in the event of insolvency procedures. 

Does it apply to charitable organisations or overseas businesses?
The changes will capture almost all UK VAT registered persons, irrespective of whether the organisation is charitable or trading or established domestically or overseas. It may be a greater challenge for overseas organisations to comply with MTD for VAT as their UK activities are likely to be a single part of a larger activity. This could also be the case for UK organisations who are part of international groups required by their overseas head offices to operate specific accounting or reporting processes and software.


What are the main requirements?

HMRC's intention is that software will be used to maintain the relevant digital records, calculate the VAT return figures and to submit the return electronically. This is to be done using functional compatible software. This software should also act as digital between the taxpayer and HMRC's systems. It will no longer be acceptable for an organisation to manually figures when submitting their VAT returns.

What software do I need to use?

HMRC has stated that it will not be providing software for organisations to use. Commercial software providers are developing solutions and some organisations will have sufficient in-house IT capability to build their own. HMRC has published a list of software providers that have MTD compliant products available.

Functional compatible software” is a software program or set of compatible software programs that must be able to:

  • record and preserve electronic
  • records in an electronic form for up to six years
  • create a VAT return from the digital records
  • provide to HMRC information and returns from the electronic records in an electronic form and by using an Application Programme Interface (API) to link to HMRC's systems
  • receive information from HMRC.
What does the software need to do?

There "must be a digital link" betweem all software used by the organisation for its VAT compliance. Examples are given in HMRC's guidance and a very common one, which is likely to be familiar to a large number of organisations, is the situation where to prepare its period VAT return the taxpayer maintains its sales and purchases data in an accounting system and then downloads data into a spreadsheet for manual manipulation before the figures are manually entered into HMRC's website for submission. Under the new rules, the links between the two software programs (accounting system and spreadsheet software) must be digital.

How should records be maintained?
Organisations will no longer be able to use manual records. Instead records will be maintained digitally using “functional compatible software”. The law will prescribe what records are to be kept digitally.
I use spreadsheets in my VAT compliance, what do I need to do?

The practical implications of the MTD changes are that organisations which create VAT returns via spreadsheets will have to make significant changes to their processes. They will most likely need to invest in new software programmes or develop their own, to ensure that they can comply with the requirements of operating "functional compatible software". There needs to be a digital link between the spreadsheet system and HMRC and the spreadsheet also needs to calculate the VAT return.

Note that if multiple spreadsheets are used (for example for different companies in a VAT group) there needs to also be a digital link between the spreadsheets.

When will this apply ?

MTD for VAT will take effect on 1 April 2019. This is very shortly after the date when Brexit is expected to take effect and the UK leaves the European Union. Organisations involved in cross-border trade will need to have planned for the tax technical changes resulting from Brexit and ensured that their software solutions are able to deal with these changes as well as the MTD requirements.

HMRC has indicated that there will be a “soft landing” period between April 2019 and April 2020 for organisations to have in place digital links between all parts of their functional compatible software. For this first year organisations, with one narrow exception, are generally not required to have digital links between software programs. The submission of the VAT return to HMRC is excluded from this relaxation though and must be done digitally with effect from April 2019.

The new rules apply to the first VAT return period starting on or after 1 April 2019. For example, if the organisation’s VAT return period ended 31 March 2019, the first VAT return to which MTD applies is the VAT return beginning 1 April 2019. If an organisation had a VAT return period 1 March to 31 May 2019, the first VAT return under MTD is for the period starting 1 June 2019. 

What about future developments and other taxes?

MTD is expected to be the most fundamental change to the tax administration system for at least 20 years and organisations should be aware that the VAT changes are just the starting point. Currently, it is anticipated that MTD will apply to Income Taxes from April 2020 and there could be a rolling quarterly reporting requirement but it is unknown at this time what level of detail will be required. It has also been suggested that the reporting requirements could differ for different sizes and complexities of organisations.

The VAT proposals have been amended over time to allow organisations to continue to use spreadsheets in their VAT compliance. It was originally envisaged that there would be a digital link between the accounting system and HMRC so that transactional data and/or summary totals showing how the VAT return figures have been arrived at would be provided in addition to the nine numbers required on a VAT return. It remains to be seen whether in the future the MTD for VAT requirements will be expanded to include this.

Organisations preparing for MTD for VAT may therefore wish to consider whether their preparations/investment in systems changes should go further than just the basic VAT requirements coming into effect from April 2019.

How can Crowe's VAT team help

Our VAT team has many years experience of VAT compliance processes along with the use of technology to improve the efficiency of work flows.

Although the implementation date is in 2019, like all technology projects, there is a lead time in making the necessary changes to be able to successfully implement the measures needed to comply with the new rules. Organisations need also to consider a strategy for the immediate requirements to be ready for the April 2019 go live but also whether these preparations should include a readiness for a likely future expansion of the MTD requirements, be it for additional VAT data or for other taxes such as Income Tax.

We can support you in a number of different ways:

Readiness for MTD for VAT

Helping you to understand your current VAT compliance processes and the changes that would be required to comply with the new requirements. This would include:

  • reviewing the sources of data used to produce your VAT returns to check their accuracy
  • evaluating the quality of the information being generated/reported to HMRC, identifying potential VAT under or over payments and highlighting VAT-related risks affecting your organisation
  • identifying opportunities for automation and other improvements to VAT-related processes within your organisation
  • mapping your current processes to identify the gaps between what you do now and the processes required with effect from April 2019 and working with you to improve the position
  • working with you to assess the tax coding currently in place and any improvements needed/training required for finance and tax staff
  • reviewing manual adjustments made in relation to your VAT returns. What adjustments are made and why? Consideration of whether there is a way that they can be made within your accounting system rather than via spreadsheet calculation.
System risks
Initially it was thought that the MTD for  VAT changes would prevent the use of spreadsheets in an organisation’s VAT compliance processes, so it is welcome news for organisations that spreadsheet information may be submitted directly to HMRC with the use of appropriate digital technology. However, there is concern about erroneous information being sent to HMRC. We can help you review your systems to ensure that the information needed for your VAT returns can be submitted to HMRC digitally and that you are compliant with the MTD for VAT rules, both in relation to the retention of digital records and the digital link used to file your VAT returns. 
Accounting system vendor selection
If you are considering changing your accounting software we recommend that you speak with the vendor about the capability for complying with MTD for VAT. We can assist you in liaising with your software providers or in reviewing the capability to ensure it complies with the new MTD for VAT rules.
VAT compliance services
An alternative solution is that we can assist you in preparing and filing your VAT returns. Tax agents will be required to meet the MTD for VAT requirements and we are working on solutions that allow us to continue to offer this service to our clients.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT