VAT: Digital by Default

HMRC have published the latest ‘Tax Gap’ figures, which provide an estimate of the difference between tax collected and the tax which should have been collected.

HMRC estimates that it missed out on nearly £12 billion of uncollected VAT in 2016/2017 alone, the largest element of which comes from businesses not taking reasonable care with their VAT accounting.

The Tax Gap figures make it clear why the Government is determined to push ahead with its ambitious Making Tax Digital (MTD) initiative. HMRC believe that making businesses ‘digital by default’ will significantly reduce the Tax Gap attributable to careless errors and mistakes which occur in the course of preparing VAT returns.

What are the new VAT rules?

Menzies microscope iconThe new rules will be mandatory for all businesses trading above the VAT registration threshold (currently £85,000) and will apply to VAT return periods commencing on or after 1 April 2019. Businesses within the scope of the MTD rules will be legally obliged to keep VAT records in a digital format and must use software which will be able to electronically transfer VAT return information directly from the digital VAT records to HMRC’s computer systems (known as ‘Functional Compatible Software’).

How will this impact businesses?

The MTD rules represent a significant change for businesses. Some will already be using accounting software which, after a suitable software upgrade, will be MTD compatible. However, even though the software may be MTD compatible, it does not necessarily mean that the VAT information recorded using the software will meet the MTD requirements. This should be reviewed, so that any necessary changes to systems and processes can be made.

Businesses using spreadsheets, multiple software systems (e.g. for billing, order processing, stock management etc) or manual processes have much more work to do in order to be ready for 1 April 2019. In some cases, this may involve moving to MTD compatible software. Most manual processes will need to be digitised. Where digital records are kept on multiple systems, they will need to be ‘digitally linked’, so that a digital audit trail flows from source data through to the VAT return data which will be electronically transferred to HMRC. There will, however, be a 12 month ‘soft landing’ period, allowing businesses time to put in place the necessary digital links.


What should businesses be doing now?

Although the implementation of MTD still seems some way off, now is the time to start preparing, in order to ensure a smooth transition to the new rules. The Menzies MTD team can help your business prepare. Whether you would like an MTD Health Check of your existing digital VAT records, help with moving to MTD compatible software or advice on how the rules apply to your specific circumstances, we are ready to help you.

For further information or help with MTD, please speak to your usual Menzies contact, or Simon Armstrong ( or 020 7465 1975).

Find out more about Menzies Making Tax Digital (MTD) advisory support.

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