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The government recently published much-anticipated draft legislation paving the way for the introduction of Making Tax Digital (MTD) for VAT. Here we consider the latest position.

Reviewing the draft legislation

The recent publication of Finance Bill 2017-19 ushered in primary legislation allowing the introduction of MTD for VAT and income tax. HMRC has launched an open consultation on the draft VAT regulations, and is seeking feedback from businesses and the industry on its plans.

The MTD for VAT requirements will take effect from 1 April 2019 and will apply to VAT-registered businesses with taxable turnover above the VAT threshold (currently £85,000). Businesses below the VAT threshold which have voluntarily registered for VAT can opt to join the regime. Some exemptions will apply, including: businesses that are run by a practising member of a religious society or order whose beliefs restrict them from making use of electronic communications; businesses to which a qualifying insolvency procedure is applied; or where HMRC considers that it is not reasonably practicable to make a return.

MTD software and digital record keeping

Businesses affected by MTD for VAT will be required to keep digital records for VAT purposes and provide VAT return information to HMRC using functional compatible software, which can connect to HMRC systems via an Application Programming Interface, or API. The software must be able to keep and preserve records in a digital form, create a VAT return from the digital information held within the software, provide HMRC with digital VAT data on a voluntary basis and receive information from HMRC that the business has complied. Digital records must be preserved in functional compatible software for up to six years.

Summary totals of digital records must be sent to HMRC at least every three months. ‘Designatory data’ must also be sent with the first update: this includes the business name, principal place of business and VAT registration number. Any subsequent changes to this data must be included in the subsequent quarterly update.

Businesses must also maintain digital records for the VAT account, including details of the output and input VAT.

The VAT account must also include any adjustments made, including correcting errors in calculating VAT payable in a previous period, claiming bad debt relief and annual adjustments for partial exemption and retail schemes.

Filing VAT returns

Businesses affected by MTD for VAT will be required to submit their VAT returns using functional compatible software. Information will be taken from digital records in order to populate the return, and there will be a minimum of 9 boxes required to complete the return. Supplementary VAT information may also be included as part of a VAT return or voluntary update.

Those firms who choose to submit monthly or non-standard period returns will still be able to do so. Some may choose to submit their VAT information more frequently, and can do so via periodic updates and supplementary data.

Preparing for change

The introduction of MTD for VAT will ultimately change the way in which businesses deal with their accounts and returns.

As always, Practice Track will be staying up-to-date in regard to the latest MTD developments. Our Making Tax Digital factsheet contains information on the key MTD issues your clients need to consider. For more information, or to place an order, please call 0800 181 343, or email