Where on earth are we in all of this?
There are some significant changes within the VAT world in the pipeline for the first part of next year and yet there is little that is certain. We consider the latest position as businesses try to prepare themselves for the changes ahead.
Making Tax Digital (MTD) for VAT MTD for VAT is due to come into effect on 1 April 2019 (less than six months away at the time of writing), but the new process which accountants and their VAT registered clients must follow is still far from clear.
Accountants are already preparing their clients for the impact, and rightly so, but it is hard to be precise at this stage. Below we consider some of the details which are currently known.
On 13 July HMRC issued “VAT Notice 700/22: Making Tax Digital for VAT”. In short, businesses above the VAT registration threshold will be required to retain VAT records electronically and to submit their VAT returns electronically. Businesses which have always traded below the VAT registration threshold can choose whether to register for MTD for VAT. Some businesses are exempt on the grounds of religious beliefs, not digital processes being reasonably practical or being subject to an insolvency procedure.
For MTD for VAT, VAT records is perhaps a misleading term. All VAT records must be stored digitally, however:
- “VAT records” in this context do not include invoices, stock books, transport documents or even the required calculations such as partial exemption, capital goods scheme, apportionments, blocked input tax recovery, etc.
- What is required is the tax point, the net amount and the rate of VAT, for each purchase and each sale.
- In addition, there is a requirement for “designatory data”: business name, address of principal place of business, VAT registration number and any VAT accounting schemes used.
- Care should be taken with reverse charge purchases, as these will either be entered twice (once as a purchase and again as a sale) or the accounting package will account for reverse charges automatically (but be careful that this is the general reverse charge and not the domestic reverse charge).
The way MTD for VAT will work on a mechanical level is that there will be an interface with HMRC: the Application Programming Interface (API). The VAT information which is stored digitally must be transferred automatically into the API interface via a digital link, for which bridging software can be used. A list of providers of bridging software is shown on HMRC’s website. In addition to accounting packages, it is expected that Excel spreadsheets can continue to be used to keep the VAT information provided it is digitally linked to the API.
In the first year a “soft landing” is permitted by HMRC, by which they mean that digital links will not generally be required and “cutting and pasting” information into the API interface will be acceptable until 31 March 2020.
There will also be an opportunity to make changes to the figures before they are submitted via the API to HMRC. This will be necessary when the results of calculations performed outside the electronic records (see examples above) are required or other adjustments need to be made. Errors will continue to be accounted for in the same way as before MTD for VAT, either by written disclosure or by including them in the next VAT return as appropriate.
There are also special rules for schemes (e.g. retail schemes, flat rate schemes) which simplify the requirement to keep records digitally.
Detail remains insufficient however to determine the exact step-by-step processes which a business and its advisers will be required to undertake. Further detail is expected and more will be known when the software providers make available the bridging software, including cost and complexity.
The UK is due to leave the EU on 29 March 2019. It is unclear at the time of writing (six months before the official Brexit date) whether the UK will enter a transition period or whether there will be a “no deal” Brexit. There have been news releases on both alternatives recently and below we work through some of the salient points.
On 19 June 2018, the UK and EU negotiators released a joint statement with draft legislation. Many questions were left unanswered as to the detail and the mechanics, but in broad terms:
- The EU Principal VAT Directive will remain in force for goods until the end of the transition period (the end of transition is not stated, but it is anticipated to be 31 December 2020).
In addition, the draft legislation requires UK businesses to submit EU VAT refund claims from other member states by 31 March 2021.
Or no deal?
The UK government states that a “no deal” Brexit remains unlikely, but that businesses might want to prepare for the possibility.
The UK Government has confirmed that the UK will continue to have a VAT system after it leaves the EU and will keep VAT procedures as close as possible to what they are now. There will however be some specific changes.
No deal: imports of goods (EU to UK)
Businesses bringing goods into the UK from the EU will follow customs procedures as for imports of goods from a non-EU country, including an import declaration, customs checks and paying any import VAT, import duty and excise duty. A UK Economic Operator Registration and Identification (EORI) number will be required.
Businesses may want to consider the reliefs available such as customs warehousing, inward processing, temporary admission and authorised use.
For imports from both EU and non-EU countries, postponed accounting will be introduced for UK VAT-registered businesses to account for import VAT on their VAT returns, rather than physically paying import VAT.
For overseas business importing parcels valued up to and including £135, a digital service will be introduced allowing online registration, accounting and payment. This will be available for businesses to register in early 2019, prior to 29 March.
Low Value Consignment Relief (LVCR) will not be extended to goods entering the UK from the EU.
Import VAT will also become due on vehicles imported into the UK, subject to the reliefs which currently exist.
No deal: exports of goods (UK to EU)
Businesses exporting goods from the UK to the EU will follow customs procedures as for exports of goods to a non-EU country, including an export declaration, customs checks and pay any import VAT, import duty and excise duty. A UK EORI number will be required.
Business-to-consumer (B2C) supplies of goods will no longer qualify for distance selling arrangements and UK businesses will be able to zero rate sales of goods to EU consumers. However, under current EU rules these goods will attract import VAT and customs duties when the goods arrive into the EU. If the customer will not be responsible for this import VAT and duty, the UK business will be required to register for VAT in the country where the goods are sold. If the country of sale is different from the country where the goods first enter the EU, the UK business might also be required to register for VAT in that country of entry. The UK seller might require local EU VAT representatives for the first time in many EU member states.
For B2B supplies of goods, zero-rating will continue subject to evidence of the goods being removed from the UK, but no EC Sales List will be required. UK businesses should also consider whether VAT registration is required in any EU member state and whether a local EU
VAT representative is required.
No deal: services (UK to EU)
The UK Government states that the VAT “place of supply” rules will remain broadly the same.
However, for UK businesses supplying exempt insurance and financial services, it is expected that input tax deduction rules will be changed.
Digital services supplied B2C to customers in the EU for which the VAT MiniOne Stop Shop (MOSS) is used will also
see a change. UK businesses will be required to register in each EU member state where sales are made or they may register in one EU member state for the MOSS non-union scheme. Businesses making sales from the 29 to 31 March 2019 will need to register for MOSS by 10 April 2019, or by 10 May 2019 if they make don’t make sales until April 2019.
HMRC is discussing the potential impact of a “no deal” Brexit with the travel industry to minimise the impact to the Tour Operators Margin Scheme (TOMS). It is not yet clear whether any changes will be required.
No deal: EU VAT refund system
UK businesses which incur VAT on costs in EU member states where they are not VAT registered will no longer be able to make only claims via the online EU VAT refund system and must instead use a different system for non-EU businesses which has different deadlines and different claim periods.
Advisers and all VAT-registered businesses should be considering the potential impact of Brexit and of MTD for VAT on their business activities. Businesses cannot yet be fully prepared for either, despite the dates for both being so close, but a level of readiness can be achieved. Some preparations can be made including research into what might have to be done and educating key personnel in the areas where steep learning curves are expected will also be important.
Brexit is on a Friday and MTD for VAT begins the Monday following immediately afterwards. It is going to be a busy weekend!
Kevin Hall’s latest VAT article in the De Voil Indirect Tax Intelligence issue 268.If you have any questions, please contact Kevin Hall on 020 3805 7469