Response: Draft legislation: The Value Added Tax (Amendment) Regulations 2018

Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation which forms part of the Making Tax Digital (“MTD”) project. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future. We wish to comment on some specific aspects of the draft regulations.

Consultation window

The draft regulations under consultation provide the detailed rules for implementation of the first element of the Making Tax Digital for Business (“MTDfB”) project which is scheduled to commence for value added tax (“VAT”) from 1 April 2019. At the time of writing this is just over 13 months away.

The timetable for the MTDfB project has already been pushed back from its original start date of 1 April 2018 in recognition of concerns expressed by many, including this Institute, around the scope and pace of the proposed project. It is disappointing therefore that so little time was afforded to respond to this crucial consultation.

The timing of the consultation was also unhelpful with the consultation being launched when many tax agents and businesses are at their busiest; during the Christmas period and in the run up to the 2016/17 self-assessment filing deadline which has unquestionably been the most challenging filing season agents have experienced for many years.

Issues with online filing for 2016/17, the delay in rolling out pre-population beyond private beta and problems with the Trust Registration Service are just some of the challenges agents have been faced with in the run up to the 31 January 2018 filing deadline.

Software

In the first phase of MTDfB, businesses above the VAT threshold will be required to keep their records digitally and provide HMRC with quarterly VAT updates from the beginning of their first VAT quarter starting on or after 1 April 2019.

Quarterly updates will have to be submitted to HMRC using software via an application programme interface which meets certain specific requirements. Businesses, and the agents who represent them, will need to assess whether their current software package meets these requirements. If not they will have to assess, choose and buy a suitable package which will take time.

If a business has an accounting period which spans their first MTD VAT quarter after 1 April 2019, the business will most likely want to ensure they have MTD compatible software in place at the beginning of that accounting period. This, for many businesses, may be well in advance of 1 April 2019 should they want to avoid changing their accounting software mid-year.

Having to change software part way through an account period would be very problematic with tax and business information spread over two different systems. Clearly this could also present practical difficulties in assessing important matters such as in year results and profitability and providing the requested information for the annual tax compliance cycle.

For example, the first businesses required to submit under MTD for VAT will be those with a VAT stagger period running from 1 April to 30 June 2019. If those same businesses prepare their accounts to 30 June, they will need to have a suitable MTD compliant software package in place by 1 July 2018.

At the time of writing, this affords such businesses just over four months to select, integrate and train staff on a new package, if one is required.

At present the live trial for this aspect of the MTD project has not yet commenced and we are not aware of any software providers who are currently offering any MTD for VAT compatible software.

This is understandable given the intention to run the live trial for at least a one year period. However this puts those businesses first affected by MTDfB under enormous pressure to choose a suitable system within a very short time window when none are currently available. As a result, many such businesses will be left to consider making a change to a suitable package mid-way through their accounting period.

Whilst we are aware that HMRC will be providing an online tool to help businesses identify which software packages will meet their MTD needs, until that is available, businesses are not in a position to begin to plan for this change.

We would also welcome clarity from HMRC as soon as possible in respect of the availability of free software for this element of the project.

Commencement date

As a minimum, we would urge the software houses and HMRC to identify as soon as possible which packages will be MTD compatible. Some businesses will also require guidance on what to do should they discover after the start of their accounting period that their software package is not MTD for VAT compliant.

Clarity as soon as possible will enable business and agents to make informed decisions that enable solid business outcomes whilst at the same time enabling greater compliance with MTD for VAT obligations from the outset.

Given the concerns and uncertainties around the timing and availability of MTD compatible VAT software, one simple change to the draft regulations could be made to alleviate these pressures. The start date of MTD for VAT could be altered so that it applies for any VAT stagger periods which fall into a business’s first accounting period (and not VAT quarter) beginning on or after 1 April 2019.

This would remove the uncertainty that businesses are currently facing and would allow lessons learned from the live trial to be considered well in advance of the start date of the regime. It would also align with the planned start date of MTDfB for income tax which is currently scheduled to begin with effect from the first accounting period beginning (our emphasis) on or after 5 April in the relevant tax year (5 April 2020 at the earliest).

Soft landing

As set out in the Addendum to the draft VAT Notice in MTD for VAT1, HMRC anticipates that there will be a soft landing period (without application of record-keeping penalties) in the first year to allow businesses, in certain circumstances, extra time to update legacy systems to be fully compliant.

This explicit recognition by HMRC that businesses will need time to adjust to this change could go further. Firstly, clarification of the specific circumstances which will be considered for removal of record-keeping penalties is needed. In addition, the soft landing period envisaged should go further to also include the removal of late filing penalties for MTD VAT returns submitted late, those which contain errors caused by MTD for VAT or those which do not contain the necessary MTD for VAT information.

It is also not clear if the soft landing period will only apply for the period 1 April 2019–31 March 2020, the first year of MTDfB for VAT or, more sensibly, if it will cover VAT return periods for the first year that a business exceeds the VAT registration threshold and falls within MTDfB for VAT.

In addition, even if a business has been able to avail of the soft landing period for VAT, when MTDfB for income tax is introduced, there should be a further soft landing period for this aspect.

We would also suggest that HMRC consider a longer soft landing period of at least 24 months. This would particularly assist those taxpayers who are facing the daunting task of moving to digital record keeping for the first time at a time when other business pressures and concerns will be foremost in their minds (for example when the UK leaves the European Union on 29 March 2019).

VAT registration threshold

According to the draft regulations and supporting documents, the MTD for VAT obligations will not apply to businesses if their VAT taxable turnover for the previous 12 months is below the VAT registration threshold in force at the start of the next month.

The current VAT registration threshold is £85,000. In the past this has increased every 1 April. In the Autumn Budget 2017, the Chancellor announced that this will be fixed at £85,000 for two years from 1 April 2018.

According to the Chancellor, the fixing of the threshold is a direct response to the Office of Tax Simplification’s report Value Added Tax: Routes to Simplification? 2 which pointed out that the UK’s threshold is currently the highest in the EU and the OECD. In response to that report, the government plans to consult on the design of the threshold.

The knock on impact of this on MTDfB timing for smaller businesses will need to be carefully considered. No further increases in the threshold or a fall in the threshold in future could mean more businesses move into MTD earlier as a result. This would be an unintended and undesired consequence of any future reduction in this threshold.

We would suggest that this could be easily remedied by fixing the VAT registration threshold in the draft regulations and general MTD legislation at the current rate of £85,000 subject to an increase if there is any upward (but not downward) change in this threshold in future.

The introduction of Real Time Information

MTD is viewed as the biggest change to the UK tax regime since the introduction of self-assessment in the 1990s. Prior to its implementation, useful lessons can be learned from the recent implementation of Real Time Information (“RTI”) for PAYE. The RTI programme implemented the biggest change to PAYE since 1944.

According to the Real Time Information Programme Post Implementation Review report 3, it took a three year period from 2013 to 2016 for 99% of businesses to integrate real time information into their payroll processes.

In addition, many key stakeholders in the tax and payroll sector still consider the introduction of RTI to have been an additional burden on their business, and experienced a transitional cost which was not fully forecast at the start of the programme.

The post implementation review also found an overwhelming consensus that the migration of more than 1.5 million employers into RTI through a staggered implementation was the right approach. HMRC should consider if a staggered approach could equally be used for MTDfB for VAT.

The review also found that many welcomed the programme’s willingness to adapt, for example by deferring the implementation of in-year penalties.

However there is no doubt that the deferred implementation of penalties and many of the exemptions announced for smaller business which only came after RTI commenced should have been considered before the regime’s start date. HMRC should learn from this in advance of the introduction of MTD for VAT.

In addition, whilst RTI is seen to be performing well, it has taken over three years to reach this point. A number of data quality issues and mismatches between HMRC and employer records continue to create discrepancies that can be time consuming and costly to resolve for employers, their agents, and for HMRC.

This position has been exacerbated by the delay in providing a real time view of RTI data for employers and agents to check against their own records, and the process for amending submissions. If MTD is to be successful, HMRC will need to consider if its systems will have the ability to provide real time accurate views of data submitted under MTD.

Overall, this leads us to conclude that despite the level of open collaboration which was seen to be a crucial element of RTI implementation, HMRC should carry out a similar post implementation review of MTD for VAT before it begins to consider its introduction for other taxes.

Conclusion

Recent research published by Ipsos Mori in December 2017, Making Tax Digital for Business: Survey of Small Business and Landlords4, looked at small businesses’ and landlords’ capacity to comply with MTD and the support they are likely to require. The research found very low awareness of the MTD requirements among small businesses and landlords.

According to the research, the vast majority of small businesses and landlords had access to digital devices that would enable them to use software under MTD. However, use of software for taxes was low and many will need convincing of the benefits of using software over their current practices; as well as support to choose and use software (one in five non-users of software lacked confidence with technology). Businesses and landlords were also concerned about the security aspect of keeping records digitally. With MTD for VAT due to commence in just over a year, this is very concerning.

The timing of MTD for VAT comes just days after the UK will leave the European Union. Already, businesses and their agents are experiencing severe pressure on their time and resources given the particular challenges that Brexit issues, such as customs regulations bring.

This pressure is expected to increase over the next few years and may impact on the ability and capacity of agents to be involved in the co-design process at the heart of MTD. HMRC should recognise this and be prepared for that challenge which will differ depending on the location and profile of businesses and their agents.

In that context, as a minimum we believe that the following three key recommendations would be helpful to businesses and their agents as we move towards MTD for VAT from 1 April 2019:-

Amend the draft regulations so that MTD for VAT applies for any VAT stagger periods which fall into a business’s first accounting period beginning on or after 1 April 2019; and

Introduce a soft landing period of at least 24 months; and

Fix the VAT registration threshold in the draft regulations and general MTD legislation at the current rate of £85,000.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.

Finally, do not hesitate to contact Brian Keegan (brian.keegan@charteredaccountants.ie) or Leontia Doran (leontia.doran@charteredaccountants.ie) of this office should you require anything further.

Yours faithfully,