By Kamlesh Chauhan, Senior Manager – VAT, haysmacintyre
Making Tax Digital (MTD) will fundamentally change and modernise the administration of the UK tax system, starting with VAT which is set to be implemented from 1 April 2019.
Who does it apply to?
All entities that are mandatorily VAT registered will be subject to MTD from their first VAT return, starting on or after 1 April 2019. For those on monthly returns, the first affected return will be the April return, but for others it will depend on their usual VAT return schedule.
Businesses that are VAT registered (including VAT groups), but who are registered on a voluntary basis, i.e. their taxable turnover is less than £85,000, are not subject to MTD. Many hedge funds may be able to avoid MTD’s initial implementation if they are able to demonstrate that they only receive income from overseas and are therefore voluntarily registered for VAT. Income from overseas does not count as being taxable income for the purposes of mandatory VAT registration.
What is it?
Those who are subjected to MTD are required to keep certain records in a digital format and digitally submit their returns. It should be noted, however, that this is not the same as submitting returns electronically as is currently the case.
Under MTD, returns will be submitted via an Application Programming Interface (API), which takes the return figures automatically from in house software systems, as opposed to having to key in the totals for the nine boxes on your VAT return. Invoices, however, do not need to be kept in a digital format or be scanned in to your software.
HMRC refers to these software systems as functional compatible software. This need not be a single programme but can include spreadsheets that record and preserve digital information, as well as providing information and VAT returns from data held in those records to HMRC by using the API.
The key point is that the information must be digitally linked, in other words, once data has been input, any further transfer, recapture or modification of the data must be done digitally. It is not possible to take figures from your accounting software and manually key it in. This will include spreadsheets, although for the first year it will be possible to copy information from a spreadsheet and enter it elsewhere.
HMRC accept that certain calculations such as partial exemption calculations can be carried out in spreadsheets outside the accounting software. The submission of the return information to HMRC must always be via an API, and whilst HMRC state that they expect most returns to be completed via API enabled software, it is also possible to use bridging software. Bridging software takes data from an otherwise non-compliant package and reports it to HMRC’s API. Alternatively, API enabled spreadsheets can also be used.
What records must be kept digitally?
You must have a digital record of your business name, the address of your principal place of business, your VAT registration number and any VAT accounting scheme that you use.
For each supply that you make you must record the time and value of the supply (exclusive of VAT) and the rate of VAT charged. This only includes sales that are included as part of your VAT return. It does not include, for example, intra-group supplies within a VAT group, though if you are only keeping some records digitally and not others this could complicate matters.
For purchases, you need to record the time and value of the supply (excluding VAT) and the amount of input tax that you will claim. This only includes purchases that end up on the VAT return, so there is no need to include salaries.
If at the point of entry, you do not know how much VAT you will reclaim, such as with overhead VAT, you can record the total VAT due and make an adjustment for the irrecoverable VAT later.
A total of each type of adjustment must be recorded as a separate line. However, you do not need to keep the underlying calculations behind the adjustment in your functional compatible software.
What to do next?
Hedge funds should assess whether MTD applies to them and whether it can be avoided for the initial roll out for VAT in April 2019.
Hedge funds that are required to apply MTD should be aware of the rules and what is required before speaking to their software providers to find out what they have done to comply with MTD. It is worth keeping in mind that the latest version of software may not be needed if there is a bridging software to link your current software to HMRC’s API.
If subject to MTD, hedge funds should be talking to their accounting software providers as soon as possible to make the necessary arrangements for MTD. This is essential, given that MTD is due to take place at the same time as Brexit, which is likely to bring additional difficulties in respect of accounting functions. haysmacintyre specialise in helping financial services firms to meet their reporting obligations, avoid pitfalls and exploit potential opportunities.
About the firm
haysmacintyre’s dedicated team of financial services sector specialists are able to offer a wide range of services and are available throughout the year to ensure you have all of the ongoing support you need. Services include:
- Audit & assurance, FCA audits, GABRIEL reporting, Corporate tax, Digitalisation of tax, LLP tax, Personal tax,
- VAT, Outsourcing, Employment tax, Company Secretarial, Payroll
Contact: Kamlesh Chauhan, Senior Manager – VAT, Tel: +44 20 7969 5584, E: firstname.lastname@example.org