Our members’ views on Making Tax Digital for VAT

Following extensive discussion with members, ICAEW has submitted its response to the Making Tax Digital: Draft Value Added Tax (amendment) regulations and notice 2018 published by HMRC on 18 December 2017. The response is available as ICAEW REP 18-2018

We have repeated many of our earlier comments, including our full support for HMRC’s digital transformation initiative, but we believe that MTD should be voluntary. Our members make this known to us at every opportunity. They and we want to help HMRC make MTD a success and welcome the assurance from the Financial Secretary to the Treasury that MTD will not be made mandatory for income tax or corporation tax until the programme is working well, but this principle should naturally also apply to VAT.

We have also made the following key points in this representation:

  1. Identifying the benefits of MTD for business. More work is needed to identify and demonstrate the benefits of MTD to business. Businesses will adopt digitalisation where they see clear benefits in the form of convenience, accuracy, time saving and prompts.
  2. HMRC resources. We are concerned about the capacity to successfully deliver MTD for VAT alongside Brexit and HMRC’s transformation project. We would welcome early clarification about whether the MTD timetable will continue as planned. Consideration should be given to deferring the start date until the outcome of HMRC’s review of its resources is known and the implications of Brexit are clearer (see below). Businesses need certainty in order to plan.
  3. More time for preparation. We are concerned about whether there is now sufficient time to make MTD for VAT fully functional from April 2019. The legislation, software development and the pilot have been delayed and MTD for VAT should only be launched formally when the pilots show that the system is working as envisaged.
  4. Start date. Businesses adopting accounting software for the first time, or that need to change software supplier to one that is MTD compatible, will usually plan to use that new software from the start of a new accounting period for income or corporation tax. We recommend that the start date of MTD for VAT is by reference to the start of the first VAT accounting period beginning on or after the start of a business’s first accounting period for income or corporation tax that commences on or after 1 April 2019. Changing mid-way through an accounting period increases the chances of error.
  5. Pilot. The pilot is now expected to start in April 2018 and in the first few months will include at most a few hundred businesses. We recommend that the pilot period should be extended over a longer period that allows as a minimum for four VAT returns to be filed by a significant number of businesses to include all sizes and sectors. It is more important to get the system right than to get it fast.
  6. Digital Links. The addendum to the draft VAT notice on MTD for VAT indicates that HMRC anticipates a soft landing period of 12 months from the 2019 start date to allow businesses to upgrade systems so that links between software are digital. This is not long enough for more complex businesses or for businesses that outsource record keeping. We think that businesses should be given at least two years from mandation to be fully compliant and that this should be given legal force.
  7. Supporting agents to help make MTD succeed. Agents help make the tax system work and, as powerful advocates for change, are essential to MTD’s success. We wholeheartedly endorse HMRC’s position that tax agents should be able to see and do all that their clients can see and do. Agents therefore need to have access to MTD for VAT as soon as access is available to businesses. This is a key lesson from RTI and one HMRC identified in its RTI Post Implementation Review.
  8. Brexit. The UK is expected to leave the EU in March 2019 which coincides with the plan for MTD for VAT requirements becoming mandatory. We are very concerned that this will place a considerable strain on the resources of HMRC to successfully deliver MTD for VAT. Consideration should be given to deferring MTD for VAT until the post-Brexit rules for VAT have settled.
  9. Businesses newly registering for VAT will need more time. Existing businesses that exceed the VAT threshold for the first time and register compulsorily will have a very limited period in which to acquire and implement MTD compliant software. To allow for a reasonable transitional period, we recommend that, as in the draft regulations for MTD for income tax, there should be a period of 12 months between the need to register and the need to meet MTD for VAT requirements.
  10. Implementation of MTD for other taxes. Any decision to mandate MTD for income tax and corporation tax should not be made solely by reference to the results of MTD for VAT. It is the success and experience of the pilots for income tax and corporation tax that should be the main factor in deciding when and how MTD for those taxes is implemented.
  11. Understanding the tax gap. We understand that one of the main policy drivers behind MTD is to close the tax gap that relates to errors and failure to take reasonable care by small businesses. We also understand that most of the gap relates to businesses trading below the VAT registration threshold. We would welcome the opportunity for further engagement with HMRC on this issue because it is a problem that needs to be addressed regardless of MTD. In the meantime, HMRC should publish details of common errors made by businesses and agents to help eliminate them.
  12. Security and other concerns. Many businesses and agents are extremely concerned about the security of the large amounts of data that will be held in the cloud and which will be transferred between HMRC and businesses on a regular basis.