UK MTD VAT obligations - current versus future state

UK MTD - Timeframe of obligations

Businesses whose taxable turnover exceeds the VAT registration threshold of £85,000 will need to keep their records digitally, using MTD functional compatible software, and create the VAT return from that (or a combination of) software, for return periods starting on or after 1 April 2019, unless the deferral period of 6 months applies.

HMRC has sent an individual letter to each deferred business to notify them that their start date is 1 October 2019 rather than 1 April 2019. If you did not receive such a letter your start date is 1 April 2019.

Screen-Shot-2019-01-31-at-09-45-37.pngBusinesses in scope will no longer be able to keep manual records of their business transaction. Digital records must by law be maintained in what is defined as ‘functional compatible software’ – broadly, software or spreadsheets (or a combination thereof) which can connect to HMRC via an Application Programming Interface (API) – and these must capture more information than is currently required to be recorded.

VAT returns using functional compatible software starts with the VAT return period beginning on or after 1 April 2019 or 1 October 2019. HMRC will allow a period of time (‘the soft landing period’) for businesses to have in place digital links between all parts of their functional compatible software. For VAT periods commencing between 1 April 2019 and 31 March 2020 businesses will not be required to have digital links between software programs.

The one exception to this is where data is transferred, following preparation of the information required for the VAT Return, to another product (for example, a bridging product) that is API-enabled solely for the purpose of submitting the 9 Box VAT Return data to HMRC. The transfer of data to this product must be digital.

For the first year where a digital link has not been established between software programs, HMRC will accept the use of 'cut & paste' as being a digital link for these VAT periods. For VAT periods starting on or after 1 April 2020, there must be a digital link for any transfer or exchange of data between software programs, products or applications used as functional compatible software.

The endgame of HMRC is to assess the VAT return numbers with underlying digital accounting records. Providing mandatory digital data via HMRC’s new API platform is the next step. Taxpayers should be ready to deliver the digital VAT accounting records (‘on request’) when the tax authorities announce a tax audit. Digitalization of these records either real-time or quarterly is a mandatory tax requirement. A comparison can be made with the 'mandatory' and 'on request' SAF-T filings in Poland and Lithuania.

UK MTD - Impact on current VAT return process

While 99% of VAT returns are filed online, only around 13% of VAT returns are currently filed directly from the software. For the remaining 86%, the VAT return figures are typically entered manually into the HMRC government gateway page and submitted to HMRC that way, ie requiring manual input/intervention.

Many businesses use spreadsheets or manual calculations to compile the VAT return figures. This process will need to be reviewed, and digitalized where necessary, to comply with the requirements.

When only standard VAT reporting in SAP is used for drafting and calculating the VAT return, nowadays a tool is only needed to consolidate the nine numbers of the VAT return. A prerequisite is however that all SAP VAT data is in SAP and is complete and meets the tax reporting requirements.This scenario is in practice often not realistic because manual changes have to be made outside SAP to realize that UK tax requirements are met. In practice, manual adjustment outside SAP is a standard need because:

  • SAP is not configured properly to realize automated SAP VAT reporting output
  • Excel or other tools are used to close this SAP gap
  • VAT relevant data is extracted from SAP and subsequently adjusted to calculate the consolidated numbers of the nine boxes of the VAT return

It is vital for a successful product implementation that the current state is determined. Please request for our UK MTD checklist. It is free of charge.

UK MTD - Diagnose future VAT return process

The difference of MTD VAT with the introduction of SAF-T and e-invoicing in other countries is that MTD is not introducing a new VAT process, but digitalizing an existing one that is and has been operational for many years. 

That means the company is well equipped to calculate the numbers of the VAT return periodically and the process owners have a certain way of working to realize that and that might also differentiate business by business. HMRC receives the VAT return numbers of the nine boxes already electronically nowadays.

The new way of submission does therefore not provide HMRC with any new insights. The only difference is that filing should take place in an automated way as manual entry of the consolidated numbers of the 9 VAT return boxes is no longer allowed, and that submission of those numbers should take place via HMRC’s new API platform. At the same, HMRC sends back the response.

Although it is a legal requirement to keep and archive the VAT accounting data digitally, it is not necessary for 2019 to submit these to HMRC. In 2019 only the submission of the nine VAT return boxes has to take place automatically. From change management to abandon working processes by replacing them on short notice with something completely new is often not preferred. Keeping close to existing VAT return process is often a mandatory condition.

Current and future state assessment

It is vital for a successful product implementation that the current state is determined first: that includes where VAT accounting data that has to be kept by law digital is stored and if it can be provided to HMRC when a tax audit is announced.

We have developed a checklist that supports such an 'as is' assessment. Please request for our UK MTD checklist. It is free of charge.

UK MTD - Keep digitalized VAT Accounting records

HMRC would like to encourage records to be kept in as near to real-time as possible, but it will still be possible to create the digital records at quarterly intervals provided the information is entered into a digital record-keeping system at that stage.

Businesses can continue to keep documents in paper form if they prefer, but each transaction (not summaries) will need to be recorded and stored digitally.

Digital records can be maintained in more than one program or software product. The use of spreadsheets is permitted. The legal requirement is that the spreadsheet has to be either API enabled or is used in combination with an MTD compatible software product so that data can be sent to and received from HMRC systems. An existing spreadsheet alone is therefore not sufficient to comply with the MTD for VAT requirements.

The new regulations set out the required content of digital records. These requirements are more demanding than at present. However, there are relaxations in Notice 700/22, for example: While some relaxations from the requirements in the Regulations exist, many businesses will not currently capture this level of detail, and so additional work / new processes will be necessary. Some of the information might not be available at the point of capture, e.g. the amount of input tax to be reclaimed on an expense, and will, therefore, require subsequent adjustment.

Archiving digital data

Records must be kept for six years or ten years if the business uses VAT MOSS. Digital records will need to be maintained for six years following deregistration, but may be kept in alternative formats rather than in functional compatible software. Assess whether digital VAT accounting data is readily available for 6-10 years and can be on short notice provided to HMRC.

Digital records on April 2020

In 2020 the digitally linked VAT accounting data will have to be submitted to the tax authorities either periodically or on request. That data will be used to review whether the numbers of the nine VAT returns submitted are correct (tax audit (almost) real-time). When HMRC announces a tax audit digital VAT accounting data of 2019 or even earlier can be requested.


Take aways 

  • Set up a project charter that will take effect preferable during feasibility but ultimately during design
  • Write a business case and problem statement
  • Define scope of the project
  • Define objectives and goals of the project
  • Involve stakeholders and define priorities
  • Set measurable milestones
  • Ensure that the right sponsors provide buy-in.
  • Identify (project) risks and how to manage them
  • Jointly validate and refine the project plan and develop a roadmap to success
  • Hold regular meeting to track progress of the various work streams

We combine technical knowledge with industry understanding and knowhow of technologically advanced tools and methodologies available in the market or developed by ourselves.

  • Focus on tax processes that could be improved
    • Manual process: same data requests are made by different stakeholders
  • As Is assessment
  • Anticipate future changes and the data needed
    • What are tax trends?
    • What is happening locally and what should be considered across jurisdictions where you operate?
    • Anticipate new stakeholders and their data needs or requests (internal and external)
  • Define scope and actions for short, mid and long term
  • Write business case for change
  • Realize sponsorship for implementation
  • What tax data is requested and by whom?
  • What tax process can be improved and what can be automated?
    • CIT, VAT, tax data warehouse
  • What is the Return on Investment?
    • Hard saving: process improvement
    • Meeting (new) tax requirement
  • What systems are in use: SAP, Oracle, etc
    • By which entities?
  • How many end-use computing tools (e.g. excel spreadsheet) do we have?
  • How do we avoid an ad-hoc solution?
    • Understand the bigger picture
    • Real problem and not the symptom

Technology-related tax risk: understand and address the potential harms and benefits of (new) technology.

Ascertaining proper IT support for ensuring efficient, timely and reliable reporting.

VAT should be considered in every aspect of the process, from concept through completion and beyond. Managing by design — looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.

We speak the language of the business and IT and no translation is needed.

VAT should be considered in every aspect of the process, from concept through completion and beyond.

Looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.

The key to success in the management is the ability to translate tax knowledge into workable business processes.