In the first phase of Making Tax Digital, businesses above the VAT threshold will be required to keep their records digitally and provide HMRC with quarterly VAT updates from the beginning of their first VAT quarter starting on or after 1 April 2019.

Quarterly updates will have to be submitted to HMRC from software via an application programme interface (API), and businesses need to ensure they have an accounting package which can do this.

Where a business has an accounting period which spans their first MTD VAT quarter, they will have to ensure they have appropriate software in place at the start of that accounting period (which may be well in advance of April 2019) or risk having to change accounting software mid-year.

Yvette Nunn, co-chair of ATT’s technical steering group, said: ‘The first businesses to come into Making Tax Digital will be those with a VAT quarter running from 1 April to 30 June 2019.

‘If they happen to have a 30 June year end, they will need to have a Making Tax Digital compliant accounts package in place by 1 July 2018 or risk changing their accounting package mid-year.

‘This gives them only five months to select and integrate a new package if their current one would not be Making Tax Digital compliant.’

Nunn warns that it would be a ‘major headache’ for businesses, to have to change mid-accounting period, as when they come to do their accounts or tax return, the information would be spread over two systems. It would also make it difficult to get an in year view of profitability.

‘HMRC will be providing an online tool to help businesses identify which software packages will meet their Making Tax Digital needs but until that is available it will be very difficult for businesses and the agents advising them to make an informed decision,’ Nunn said.

The government is currently consulting on draft regulations and a VAT Notice giving a better idea of how Making Tax Digital for VAT will work. The consultation closes on 9 February, and the intention is for the regulations to be made no later than April 2018.

Although the government has given no indication yet of whether any free software will be available to file VAT accounts electronically, the consultation sets out some indication of the basic requirements for future filing, stressing that the information must be kept in ‘functional compatible software’. So far none of the major accounting software providers have indicated that they intend to provide any form of free software.

It will be possible to use more than one software program; however, where a set of programs is used, there must be a digital link between them.

Under the HMRC definition, digital transfer includes ‘option[s] such as XML import/export, macros or linked cells, but does not allow manual transfer or transposition of data’. Accountants and tax agents will be able to submit VAT returns for clients and to do this, they will need access to the client’s functional compatible software.

While HMRC has indicated there will be a soft-landing period of one year to allow businesses to update their software systems, Nunn wants HMRC to do more to ensure business face minimal disruption in the switch to Making Tax Digital. 

‘The ideal solution would be for the Making Tax Digital for VAT start date to be altered so that it applied from a business’s first accounting period (and not VAT quarter) starting on or after 1 April 2019.

‘If that is not possible, we would urge software houses and HMRC to identify as soon as possible which packages will work for Making Tax Digital.  Businesses also need guidance on what they should do if they only find out in the middle of an accounting period that their software package is not likely to be Making Tax Digital compliant.

‘Clarity on these matters will enable informed decisions that provide good business outcomes at the same time as ensuring compliance with Making Tax Digital obligations from day one,’ Nunn said. 

The information for VAT filing under Maing Tax Digital must be kept in ‘functional compatible software’. This means a software programme which allows information to be recorded in an electronic form and which sends and receives information to/from HMRC using the API platform (including API-enabled spreadsheets).

It is possible to use more than one software program; however, where a set of programs is used, there must be a digital link between them.

HMRC states that digital transfer includes ‘option[s] such as XML import/export, macros or linked cells, but does not allow manual transfer or transposition of data’.

Draft legislation: The Value Added Tax (Amendment) Regulations 2018 is here.

Report Pat Sweet