HMRC clarifies reporting requirements for charities under Making Tax Digital for VAT

HMRC’s Making Tax Digital (MTD) agenda continues to evolve (and members should keep checking this page for regular updates)

CTG had become aware of mixed messages from HMRC officials as to the scope of the MTD exemption and sought clarity on the implications for charities.

A summary of a recent meeting with HMRC is outlined below, which confirms that at present there is no MTD charity exemption for VAT, but there will be an exemption for corporation tax. HMRC has recently confirmed this in response to a parliamentary question.

HMRC also explained how MTD will work in practice, including the accounting processes that will be required. CTG has agreed to work with HMRC during the development process.

Summary of CTG meeting with HMRC on Making Tax Digital (MTD) – 11 October 2017

HMRC’s objective is to reduce taxpayer information processing errors. Using digital accounting processes is key to this.

MTD for corporation tax has been deferred to an undetermined future date. HMRC will formally consult on the policy design before implementing any changes. Subject to this, when introduced, charities will be exempt, but their subsidiaries will have to comply with MTD.

MTD will apply for VAT from April 2019 for charities and their subsidiaries (subject to the exemption for all businesses whose taxable supplies are below the VAT registration threshold of £85k).

This means:

  1. All prime records must be kept in electronic format, and should include any adjustments made.
  2. Each step in the accounting process after inputting source data must be digitally managed. In other words, after inputting invoices, journals etc., software programs must sort and consolidate data right the way through to uploading the VAT return totals to HMRC. The current HMRC portal will be ‘closed’ for taxpayers within MTD with VAT return data being submitted direct to HMRC systems. Data transfer between digital accounting records and, say, excel working sheets to apply a partial exemption method, must be by electronic links* (see below as this position may yet change)
  3. Functional compatible software will be required to communicate between the charity’s digital records and HMRC. HMRC will not provide this software but instead software companies are working with HMRC to update their accounting packages or provide stand-alone linking tools.
  4. HMRC will be able to digitally examine the 9-Box VAT return data as it reaches their systems, but it will not be able to access your underlying data. HMRC will encourage taxpayers to voluntarily provide some additional information to aid a better understanding of their VAT position.
  5. In time HMRC will sense check the data it receives at the point of submission and prompt a question or request further data if there appears to be an inconsistency with previous information or an anomaly.
  6. HMRC will be piloting the changes from Spring 2018 and is keen to ensure a wide range of different organisations, including charities, take part in that pilot to ensure everything is thoroughly tested ahead of mandation from April 2019.

CTG-HMRC meeting on MTD (11 October 2017)

UPDATE: Relaxation of MTD digital automation requirements?

It appears that that there may still be some flexibility as to the extent to which HMRC will require full digital automation.

Our original update gave HMRC’s confirmed position at the time of our meeting, but since then HMRC has written to us to say it is looking at the practical difficulties we described about automating the gathering and transferring of relevant figures from spreadsheets that contain data relevant to the VAT declaration. HMRC stated “this is a much broader issue and is likely to be relevant for any large organisation with disparate/old systems.  We are currently finalising some parameters here and will provide a broader update on this before the end of the year”.

We also understand that these practical difficulties were discussed at recent meetings between HMRC and the Chartered Institute of Taxation (CIOT) with the Institute told “the export of figures from software into spreadsheets (to calculate adjustments) will not be required to be performed electronically.  A manual transfer of data in and out of the MTD compatible software is acceptable.”  It is understood that HMRC will confirm exactly what this means by writing to CIOT, and we will inform you once this becomes available to us.

On the face of it, data would appear, therefore, to be transferable to the digital account by means of copying spreadsheet cell contents between accounting records, or even (perhaps) typing a relevant figure into those records but still requiring a digital upload to HMRCs system using “functional compatible software”.  However, the real scope of this policy may well evolve over time.  We hope that this represents a realistic assessment by HMRC of the extent to which VAT accounting can be made truly digital, given the tax’s complexity.