“Making Tax Digital”—Still Clear as Mud?


 

Under Making Tax Digital (“MTD”) many businesses in the U.K. will need to keep digital records and make quarterly reports to the U.K. tax authority, HM Revenue & Customs (“HMRC”), but when will it actually apply to you?

On your marks, get set….GO! Sorry, what do you mean, you're not ready! You've known about the start for a while, admittedly you didn't know the precise rules. 

Actually, were you ready? Did you know that the start, April 1, 2019, might really mean July 1, 2018? Are you with me, do you know what I am talking about? I am of course referring to the MTD for VAT or rather the “draft” explanatory memorandum and draft notice to make the changes to the VAT regime from April 1, 2019 (see http://src.bna.com/v58). 

All rather confusing, isn't it, as I'm not being clear, but then I do not think HMRC is either. 

The requirement for businesses with VAT taxable turnover in excess of the registration threshold, (that diminishing number frozen in the last budget), to keep and maintain digital records will not “in theory” begin until April 1, 2019, but what if your financial year end is June 30. Your annual accounts will cover the period from July 1, 2018 until June 30, 2019 and if my knowledge of the Gregorian calendar is correct, your quarter commencing April 1, 2019 will fall into accounting period ended June 30, 2019, and be subject to the incoming legislation, MTD for VAT. So if you are NOT going to waste time on using two accounting systems, you will have two choices:

(i) Change your year end to March 31, 2019, either by bringing the year commencing July 1 or later to an end, or by extending your existing year end, subject to what is allowed by Companies House if the business is incorporated; and

(ii) Buy new compatible software now and comply earlier than the start date.

These are decisions you were either not expecting to make yet, or you've not thought through yet, because you've not fully understood the impact and the real effect of the start date. The latter is understandable as the legislation is still to be published in its final form. 

For those affected there simply isn't the time to get ready, and I doubt there will be sufficient time to prepare properly. 

As I write, there are draft regulations and a draft VAT notice, and there is “Making Tax Digital for Business Addendum to VAT Notice” which starts on the first page of “VAT Customer Journeys” (see http://src.bna.com/v59). 

The addendum supplements the guidance set out in Section 3 (Digital Record-Keeping) and Section 4 (VAT Returns) of the VAT notice. The addendum is very helpful in that it makes clear reference to a “soft landing,” or is it that helpful, given the precise wording, “HMRC anticipates that there will be a soft landing period.” Once again, it is as clear as mud! Will there be a soft landing or won't there? Do you wait until the guidance is published in its final form? What will agents advise their clients to do? 

Whilst the addendum also states “the legislation will specify what needs to be kept recorded digitally,” will it be published in its final form before businesses need to make changes to their software? Or as will be the case for many, use software solutions for the very first time. 

I am not against digital solutions, but I do believe it is only fair that mandatory changes such as Making Tax Digital for Business (“MTDfB”) are brought in properly, without onerous obligations on taxpayers and businesses and, importantly, with sufficient time to prepare. It would be really helpful if the regulations once finalized might amend the implementation date, such that the new regulations might be introduced with effect from the beginning of the first accounting period commencing on or after April 1, 2019. It is a very small change, but will be a valuable lifeline to those who will be forced to change their software or introduce software to their business for the first time. 

Another concern of mine is the requirement to preserve (my emphasis) these digital records. The VAT notice states “recording and preserving electronic records in an electronic form.” The taxpayer has no control whatsoever over the organization providing the Application Programme Interface (“API”). To force a condition upon someone, the person must reasonably be able to comply. Just yesterday I tried to open an old file only to find I could no longer access it. Only then did I remember taking steps to save the files in an alternative place when I knew this internet giant was removing its support for an App I had used for a while. So what if I did make the digital record, but then the digital record was removed? The software suppliers of old have back-up facilities, will Apps? And, confessing my lack of software knowledge, how might the back-up be stored or retrieved without the original App. What if a business made their digital record, the business owner retires and ceases trading, having diligently followed the requirements of MTDfB, but then the solution used ceases without the taxpayer being aware? 

The current situation with Carillion is proof, if proof were needed, that even big “Blue Chip” businesses collapse, or cease. Failure and extinction can happen to any business, who will be responsible then? 

Time for a practical approach to this!

 

Yvette E Nunn is Director at Berkeley Associates, U.K.

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