VAT’s App? VAT Are We Waiting For?
Katy Howard and Tom O’Reilly take stock of the latest news on making tax digital.
Making tax digital (MTD) has its origins in George Osborne’s famous announcement in the March 2015 Budget, when he was Chancellor for the Exchequer, that the annual tax return was to be abolished: ‘Millions of individuals will have the information HMRC needs automatically uploaded into new digital tax accounts’, ran the summary of the announcement. ‘Businesses will feel like they are paying a simple, single business tax – and again, for most, the information needed will be automatically received.’
Where are we now on making tax digital?
In December 2015, the MTD roadmap outlined this ambitious target in more detail, setting an equally ambitious timeline for transformation of the tax system by 2020. Originally, this was to include, for example, a requirement for most businesses, self-employed people, and landlords to start updating HMRC quarterly for income tax and National Insurance contributions (NICs) purposes through their accounting software, starting in April 2018, followed by VAT reporting in April 2019 and corporation tax in April 2020. The roadmap included other developments too, such as the personal tax account and the use of third-party information.
Election ‘purdah’ – resulting from the EU referendum – has impacted on the timetable, with HMRC’s first six consultations published only in August 2016, followed by the responses in January 2017. The 2017 general election has also affected the timeline; prior to the election, only a much-reduced Finance Act 2017 was enacted without any of the MTD provisions.
However, on 13 July 2017, the government announced that, given the number of concerns that had been raised about the pace and scale of change, MTD will now be mandated from April 2019 only for businesses with a turnover above the VAT registration threshold (currently £85,000), and only for VAT purposes. Other businesses will not be asked to keep digital records or update HMRC quarterly until at least 2020. Businesses of any size will be able to join MTD on a voluntary basis for all taxes from April 2019. A first stage trial of MTD has already begun for income tax and NICs. HMRC will now be starting small-scale, private testing of MTD for VAT, followed by a wider live pilot in Spring 2018.
The government has confirmed that it will re-introduce the legislation to give effect to MTD for business that was published in the Finance Bill after the spring 2017 Budget. The Finance Bill resolutions of 20 July 2017 included resolutions both on digital reporting and record keeping, and on digital reporting and record keeping for VAT. This draft primary legislation contained only limited information on the requirements for businesses, including as to the making of VAT returns and submission of information, with the detail expected in draft regulations, which would otherwise have been published over the summer.
A key point is that the duty to keep records for VAT (in VATA 1994, Sch 11, para 6) may currently be discharged either by preserving them in any form and by any means, or by preserving the information contained in them in any form and by any means, subject to any conditions or exceptions specified in writing by HMRC, but in future HMRC will be able to make regulations to provide for the form and means by which they are to be kept and preserved. Different provision for different cases may be included in these regulations and they may also include powers for HMRC to specify conditions and exceptions. If these regulations make provision requiring records to be kept or preserved in electronic form, as expected, the supplementary regulation-making powers on electronic communications and records that will be added to TMA 1970 will also apply to them.
These will deal with key points such as the electronic form to be taken by records kept, the production of the contents of records and authenticating records. An HMRC decision about the application of regulations under FA 2002, s 135 (mandatory electronic filing of returns) is already an appealable matter. However, the draft legislation extends the scope of the relevant provision (VATA 1994, s 83(1)(zc)) to decisions about the application of regulations requiring records to be preserved in electronic form , under the new legislation on record keeping and requiring information other than returns to be submitted by electronic communications (under FA 2002, s 136).
Starting with VAT
It is unsurprising that the government has now chosen to start with VAT. Dealing with VAT electronically is to some extent a familiar area; 98 per cent of VAT-registered businesses already file electronic returns, albeit most do not use software to do this, so work is likely to be required to eliminate manual interfaces from the VAT process. Since 1 April 2012, regulations have been in place requiring most VAT-registered businesses to submit VAT returns electronically, subject to certain exceptions for those whose religious beliefs are incompatible with the use of electronic communications, businesses subject to insolvency procedures, and a broad category that might be described as ‘digitally excluded’ (persons for whom HMRC ‘are satisfied that it is not reasonably practicable to make a return using an electronic return system…for reasons of disability, age, remoteness of location or any other reason’).
Most traders already have to submit VAT returns quarterly, although some do so more or less frequently, depending upon their VAT profile or turnover. HMRC’s latest announcement refers to quarterly updating, but also states that ‘no business will need to provide information to HMRC under [MTD] for business more regularly than they do now’. It is not yet clear exactly what this means for the annual accounting scheme currently available where VATable turnover is £1.35 million or less, or for businesses usually in a repayment position who may prefer to file monthly. Further detail is expected in due course, including on other important areas, such as agents and VAT groups.
The fact that MTD is kicking off with VAT may also indicate an increased focus on risk in this area and indirect taxation in general. Another legislative initiative that will be re-introduced and that was originally planned for the spring 2017 Budget includes provisions on the disclosure of avoidance schemes relating to VAT and other indirect taxes. The UK’s exit from the European Union is likely to make indirect taxation an even hotter topic, and not only from a purely administrative point of view: a good understanding of the principles of VAT and customs duties will be necessary. But Brexit may mean a wholesale redrafting of VAT, which will add further complication to the introduction of MTD.
Will points mean penalties?
The only other significant MTD development since the spring 2017 Budget is that there have also been a number of responses – albeit not published by HMRC at the time of writing – to the second consultation on sanctions for late submission and payment within the MTD context, which launched on 20 March 2017. This consultation invited submissions on potential penalty models, as well as a new penalty interest. The consultation document also reiterated a previous pledge to give taxpayers a minimum of 12 months from when they become subject to MTD before the penalty regime will come into effect.
The options under consideration are:
- Model A – a points-based system (with each tax regime having a separate penalty count), whereby points would accumulate until a penalty is charged and the penalty points are reset to zero only with a certain number of consecutive timely submissions, depending on the number of submissions the taxpayer is required to make within the relevant regime;
- Model B – a regular automated review of a set period whereby penalties would be charged according to the number and duration of missed submissions within it; and
- Model C – which allows for a limited number of penalties for late filing to be suspended (HMRC suggest two, with that number being reset after a period of good compliance). So far, Models A and C seem to have found more favour.
One view of Model A is that it may be more likely to assist taxpayers on low incomes to deal with their tax obligations, while an advantage of Model C may be that it incentivises businesses to submit on a ‘better late than never’ basis. Model B, however, may miss the opportunity to use the real-time information that HMRC will hold under MTD.
The new sanction being considered for late payment, to replace default surcharge and all late payment penalties currently in operation for income tax, corporation tax, and VAT, is penalty interest – in addition to late payment interest – at the statutory interest rate of 8% for late payment of commercial debts plus the bank of England base rate.
HMRC did not ask any specific questions on penalty interest but indicated that they would consult on draft legislation later in 2017 and that further views on the proposals would be welcome. Responses to date have raised concerns, such as the concept effectively double counting the base rate, which is already included in late payment interest, and the proposed 14-day grace period before penalty interest starts to run being insufficient to enter into a time to pay arrangement.
Although recent political developments and consultation feedback have affected the timing of MTD, the direction of travel remains as before. The extra time for businesses, particularly smaller businesses, to adapt will be welcome. However, although there is already an electronic element to VAT administration and compliance, with which mandatory MTD will commence, businesses and their advisers should not underestimate the process changes that may be required as a result.
Katy Howard CTA joined law firm Joseph Hage Aaronson LLP (uk.jha.com) as an associate, having previously worked in professional services firms and central government.
Tom O’Reilly is a former HMRC tax professional and now a tax assistant, also at Joseph Hage Aaronson LLP.
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