Making Tax Digital (MTD) affects VAT registered businesses with turnover greater than £85,000

From April 2019, all affected businesses will be required to keep digital books and records and must set up a digital tax account with HMRC to submit VAT returns online.

As the accounting system must interact digitally with the HMRC business account, entering VAT return figures manually into the Government Gateway system will no longer be viable. All affected businesses who cannot comply with these new rules risk financial penalties and business disruption associated with being classified as “non-compliant “ by HMRC.

The new MTD regime poses special challenges for rural businesses. In 2017, during the MTD consultation phase, the National Farmers Union (NFU) proposed an exemption for the 5% of the population without access to highspeed broadband.

However, this plea was largely ignored as under MTD for VAT a business will not have to adopt the MTD rules where HMRC is satisfied that:

“It is not reasonably practical to use digital tools to keep business records or submit returns for reasons of age, disability, remoteness of location or for any other reason”. An application process will be required.

Recent announcements from HMRC of how businesses will adopt digital and software links suggests that HMRC are likely to take a tough stance when it comes to granting exemption on the grounds of location. Although where a business currently has an exemption from online VAT filing it is anticipated this will be rolled over for MTD for VAT. The situations where a remote location exemption will be given is likely to be only in very limited circumstances. A further consideration for all businesses is that the new MTD for VAT regime coming into effect next April is just the initial instalment under HMRC’s digital plans. Electronic submission of quarterly income tax and corporation tax figures are expected to be required by HMRC during 2020.

Furthermore many farms and landed estates are subject to special tax rules, partial exemption and other complexities. This makes development of appropriate and relevant software and APIs much harder given it is a niche market.

What options are available to rural businesses to comply with MTD?

  • When HMRC discuss MTD and “Digital Tax”, the mention of laptops, smartphones, tablets and Application Programming Interfaces (“APIs”) is always high on the agenda. APIs let software systems talk and interact with each other electronically, rather than manual data input. HMRC believe that by insisting on the use of APIs in business’s accounting systems there will be a significant reduction in tax return errors, leading to better tax compliance. It will also inevitably make it easier for HMRC to conduct Audits and allow their software to interrogate data to look for mistakes and inconsistencies that currently demand a huge amount of Tax Inspector resource. Therefore, for all businesses, including rural businesses to reach full compliance with HMRC what is required is a new approach to digital accounting and record keeping plus access and connectivity to the internet either directly or indirectly.
  • Whilst some desktop accounting software packages and local area network (“LAN”) based systems (and in very limited cases even some spreadsheet based approaches to preparing VAT returns) will be feasible in the short term, the consensus in the tax and accounting profession is that businesses will need to move to some form of Cloud accounting package.
  • In recent months, competition in the market for Cloud accounting services has become fierce, resulting in providers reducing licence fee subscriptions to entice businesses to adopt the Cloud. The key players being Xero, Sage, Quickbooks and FreeAgent and larger/ more sophisticated businesses opting for enterprise platforms such as Netsuite and SAPbyDesign.
  • To run Cloud, fast internet speeds are necessary and for rural business this is the major barrier. The lack of land based broadband services in countryside locations is problematic but new remote satellite highspeed broadband with fixed price upload and download data allowances from the major satellite providers could provide adequate and more affordable online access to allow Cloud Accounting to be adopted for the rural sector.
  • For those rural businesses not moving to Cloud Accounting there is certainly a conundrum to be solved and choices to be made as the countdown to April 2019 ticks ever closer.

Consider the following for MTD compliance:

  • Retaining a manual book-keeping system is no longer an option from April 2019.
  • The use of spreadsheets is limited and only available as a short term measure; there is considerable uncertainty over whether such an approach will be available and how it will work in practice;
  • Investigate whether your existing desktop accounting package meets MTD criteria and speak to your software provider about their developments. Some providers will no longer support certain non cloud products. For many rural businesses, the existing VAT return / accounts outsource process and relationship with the accountant will need revisited for MTD compliance – in the absence of internet access, “physical” information such as paper invoices, receipts, other manual records will still need to be sent to your accountant, however under MTD this will now need to be transformed into the required digital format which adds more time, effort and inevitably cost to the process. Delivering data to your accountant via encrypted USB or similar device may be a short term solution.
  • We are not expecting any further delays or deferment of MTD; so now is the time to take action.

For more information, please contact our MTD expert Mark Pryce. Our specialist Cloud Accounting team will also be able to help you prepare for April 2019.

The information in this article should not be regarded as financial advice.  This is based on our understanding in September 2018. Laws and tax rules may change in the future.