I recently held an ICAEW webinar on ‘MTD for VAT 2021: The Hidden Opportunities’. The webinar outlined the implications of the delay and how to comply, which seemed to really resonate with those listening in.
We received numerous questions from the audience who raised some very valid concerns about just how they will practically implement the digital links mandate when it comes into force from April 2021. Given that their concerns will no doubt be shared by many, I thought it worth sharing some of their questions and my responses with you.
Q. Does the delay for MTD digital links include additional time for VAT Groups?
A. The delay applies to all VAT registered entities who have to comply with MTD
Q. Is the deadline for VAT Groups October 2021?
A. The delay brings all VAT entities who have to comply with MTD back into alignment with digital links mandated from 1 April 2021 for all
Q. Does creating invoices manually meet the digital records?
A. Creating invoices manually is fine within the wider context of keeping records in a digital format providing the invoice amounts are entered into your functional software for inclusion in your digital records that will flow through to the VAT return.
Q. Will HMRC provide a solution similar to VIES for validating GB VAT Registration Numbers going forward as we leave the EU?
HMRC is developing a system so that UK VAT numbers can continue to be validated.
Q. Whilst adjustments and amendments are acceptable outside a closed MTD system, would it be compliant to account for reverse charges as such an adjustment?
A. If your finance system is not able to deal with and calculate reverse charges then it is acceptable to calculate and enter reverse charges as an amendment into your MTD VAT return solution.
Per VAT Notice 700/22 4.3.6 the adjustment for the total tax you are required to pay on behalf of your supplier under reverse charges must be contained in your MTD software as part of the summary data, and the adjustment must be done as a separate adjustment.
As it is an adjustment this can be done in the software directly and does not need to be digitally uploaded BUT all the transactions behind the adjustment must be contained in the digitally linked source data. However, it is also important to make sure that the VAT on reverse charges appears in your VAT account which needs to be in a digital format.
Q. I run a company where we have agents who do most of the payments and collect some of the monies. I have to do a certain amount of manipulation to their quarterly report into our records. Any advice?
A. When it comes to third party provided data, it is important to work with the provider to agree on a format that would enable you to reduce any manual manipulation effort and to be able to transfer the results into your functional software for the purposes of including it in your VAT return.
Q. For adjustments (e.g. C79 figures) that are calculated on a separate spreadsheet, is something like an ‘@get’ function to transfer the total of such C79 amounts from the separate spreadsheet to the VAT return compliance software acceptable?
A. Provided the C79 amounts transfer between spreadsheets electronically and are not manually entered into the receiving one or copy and pasted in, this would be fine for digital links purposes.
Q. Is data input allowed in VAT calculation spreadsheets e.g. a field to define year/period to look up in the data download?
A. It is the transfer of the transaction and VAT amounts which are the important elements of the data that need to be transferred digitally and so, on my reading of the guidance and rules, I would conclude that entering a year/period to look up the data required would be acceptable.
Q. Does this mean that we can work out our disallowable VAT or Partial Exemption manually on a separate spreadsheet and then link the figure we need into the VAT return? The VAT return would have been digitally downloaded off the system.
A. HMRC’s guidance specifically calls out that adjustments such as those required for Partial Exemption calculations can be performed outside the MTD compatible software and the resulting adjustment can either be typed into the software manually or transferred in digitally, with the digital transfer having the lower risk of error, (see VAT Notice 700/22 section 4.4, example 7).
That being said, is worth noting that section 4.4 of the VAT notice also states that using software for all your calculations will reduce the risk of errors in your returns. Therefore, it would be better to be able to do this type of calculation within a comprehensive MTD compliance solution that enables you to calculate the disallowable VAT or Partial Exemption directly from your digitally linked transaction data. This will provide an end to end digital journey from your source data to the final amounts contained in the return.
Q. Do you think HMRC will defer Domestic Reverse Charge for Construction Services due 1 October 2020?
A. I cannot find anything to suggest that there will be a further postponement to the Domestic Reverse charge requirements due in October this year.
Q. For reverse charge transactions, will we be allowed to continue to calculate the VAT amount on each individual transaction using formulae in a spreadsheet rather than needing to have that posted into the actual finance system (ie posting a debit and credit for the VAT amount)?
A. If your finance system is not able to deal with and calculate reverse charge amounts, then it is acceptable to calculate in a separate spreadsheet and transfer the results digitally into the VAT return process. However, it is also important to make sure that the VAT on reverse charges appears in your VAT account which needs to be in a digital format.
Snap Poll Results
We also conducted a snap poll during the webinar which revealed some interesting views about how things may play out longer term. Just over a third expect digitalisation to help accelerate digitalisation ie increase what was already an upward trajectory of adoption.
With regards to which aspects of the VAT process may be the most difficult to digitally link, the greatest area of concern was amendments and corrections, followed by adjustments. An overwhelming 75%+ believe HMRC will now be tougher in its enforcement of compliance following the deferral.