VAT Notice 700/22: Making Tax Digital for VAT was published on 13 July 2018, alongside two other documents: Making Tax Digital for Business – Stakeholder Communications Pack and Software suppliers supporting Making Tax Digital for VAT.
This article focusses on the tertiary law and guidance in Notice 700/22. HMRC have the power to issue Making Tax Digital (MTD) legislation by way of notice. Such legislative measures are presented in the grey boxes in the notice, prefixed by “The following rule has the force of law”. The draft VAT notice was published for consultation in December 2017 and this revised version contains much-needed explanations and examples.
Some of the key developments are as follows:
In my article of 21 June 2018, Making Tax Digital and the Digitally Excluded, I wrote about how accountants needs more guidance on how they can continue to help their digitally excluded clients under MTD. In particular, I was referring to those clients who, for whatever reason, are unable to use computers and rely on their accountant to fulfil their online filing obligations. MTD for VAT will require every business to set up their own business tax accounts, set up emails and action agent authorisations. Digitally excluded clients will not be able to do this.
The notice sets out the criteria for digital exclusion (undergoing insolvency procedure, religion, disability, age, remoteness of location or any other reason) and acknowledges that, under MTD, digital exclusion may apply “even if you are not currently exempt from online filing for VAT”.
To be honest, we didn’t expect HMRC to give more information about digital excluded; they advise traders to contact the VAT helpline if they feel that any of the criteria apply. According to the notice, if HMRC do not consider an exemption to be an appropriate, digital assistance and online support may be available. We definitely require more information on this topic.
The MTD for VAT regulations refer to ‘digital links’ but even after reading the draft MTD for VAT notice in December 2017 we were left wondering what a digital link actually is! Thankfully, the revised notice gives us some clarification.
Firstly, a ’force of law’ grey box tells us that “a digital link is an electronic or digital transfer or exchange of data between software programs, products or applications” and is not the use of a cut and paste function.
Secondly, the notice provides further explanation; a digital link does not involve manual copying or transposition. This means that writing down figures from one software program, then manually typing them into another software program, does not constitute a digital link.
Some examples of digital links are given in the notice are:
- Linked cells in spreadsheets
- Emailing a spreadsheet to an agent
- Saving records onto a USB and passing it to the accountant
- XML, CSV import and export, and download and upload of files
MTD for VAT software could comprise more than one software program. This is acceptable, as long as there is a digital link between the programs. HMRC previously announced that digital links will not be mandatory until VAT return periods beginning on or after 1 April 2020; the notice confirms this soft-landing period.
Examples of commencement dates
Compliance with MTD is mandated for VAT return periods commencing on or after 1 April 2019. The notice gives several examples of how this rule will affect businesses.
The MTD for VAT regulations mandate businesses to digitally record the ‘time of supply’ for each supply made. The VAT Act 1994 defines ‘time of supply’ as the tax point, which is determined by the basic tax point/actual tax point rules. There was a concern that traders using the cash accounting scheme would have to digitally record both the tax point of a supply and the date the money changes hands. This would be a big ask for those traders who currently use their cash book as the starting point for their VAT returns. Fortunately, the notice says that for those using cash accounting, the time of supply is the date payment is received or made.
Sales invoices for mixed supplies
The mixed supply example given in the notice is the sale of a meal deal, which comprises goods at different rates of VAT (e.g. a zero-rated sandwich, a standard-rated bag of crisps and a standard-rated soft drink).
A ‘force of law’ grey box tells us that it is acceptable to digitally record the total value of the supply and the total value of the output tax due.
Sales made through third parties
A ‘force of law’ grey box states that supplies made through third parties are only required to be entered in the digital records once the information has been received from the third party. It is acceptable to treat the information provided by the third party as one sales invoice.
The example given in the notice is that of supplies being made via a letting agent. As long as the supplies on the letting agent’s statement are made in the same VAT return period and are charged at the same rate of VAT, they can be digitally recorded as one single supply.
We believe that supplies made via online sales platforms such as Amazon or eBay should be treated as supplies made via third parties.
As per the draft MTD for VAT notice published in December 2017, a concession for supplies made under a retail scheme (i.e. supplies of goods or services made to consumers) will be made. It is acceptable for the trader to keep a record of daily gross taking (DGT) in respect of retail supplies and it will not be necessary to keep a record of the individual supplies that make up the DGT.
Reclaim of VAT on employee expenses
The notice provides that when VAT is reclaimed on employee expenses and the employee provides the value of more than one purchase (i.e. in an expense claim), the total value and the total VAT can be recorded digitally.
It was hoped that similar provision would be made in respect of petty cash purchases, but this hasn’t been made in the notice. Unfortunately, we’ll have to digitally record those individual purchases of 79p pints of milk!