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HMRC delays making tax digital for large and complex businesses

UK businesses with complex VAT requirements will not be mandated to use the new 'Making Tax Digital' (MTD) service to keep VAT records digitally and to use software to file VAT returns until 1 October 2019, HM Revenue & Customs (HMRC) has announced.19 Oct 2018

At the same time HMRC has also announced the launch of a pilot for around half a million businesses whose affairs are up to date and straightforward.

"The announcement of the delay is recognition that some of the UK's largest taxpayers are experiencing difficulties in getting ready for MTD on 1 April 2019. For these taxpayers, the 6 month deferral is certainly welcome," said Stuart Walsh, a VAT expert at Pinsent Masons, the law firm behind

"However, the vast majority of businesses are unaffected by the announcement, and we understand that there are currently hundreds of thousands of taxpayers that are not ready for the 1 April deadline. With this deadline fast approaching, it would not be surprising to see similar deferrals offered to other taxpayers," he said.

All VAT registered businesses with a taxable turnover above the VAT threshold were expected to be required to use the MTD service for VAT from 1 April 2019. HMRC says that the delay will apply to "a small minority of VAT-registered businesses with more complex requirements". However, all other affected businesses will be required to use MTD from 1 April.

"As part of planning for the VAT pilot, HMRC continued to engage with stakeholders and listen to their concerns about business readiness for Making Tax Digital. We have made the decision to delay mandation for these customers until 1 October 2019 to ensure there is sufficient time to test the service with them in the pilot before they are mandated to join," the HMRC notice said.

The  six month deferral will apply to many of the largest businesses as it applies to VAT divisions, VAT groups and  those required to make payments on account.

Businesses which owe more than £2.3 million of VAT in any period of 12 months are required to make monthly payments on account of their VAT liability. Generally businesses pay VAT quarterly, in conjunction with their quarterly VAT returns.

The six month deferral will also apply to public sector entities required to provide additional information on their VAT return, such as government departments and NHS Trusts. It will also apply to local authorities, public corporations, traders based overseas, annual accounting scheme users, trusts and ‘not for profit’ organisations that are not set up as a company,

HMRC says that the deferral will apply to around 3.5% of mandated customers.

MTD means that business will be obliged to use MTD-compatible software to file their returns. This will need to include an Application Programme Interface (API). API is software that that links 2 or more software programmes together, allowing them to exchange data. HMRC are not providing any free software for this, so affected businesses will need to purchase commercial software. HMRC has published a list of the software providers it is working with in relation to MTD.

"Taxpayers are expected to have API enabled software in place for 1 April 2019.  Without the software, taxpayers will be unable to submit VAT returns, creating a potential exposure to penalties for non-compliance.  It is therefore important that the software is installed in advance of the deadline and that taxpayers are comfortable using it," said Maryse Heijnen, another VAT expert at Pinsent Masons.

MTD is part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. The improved accuracy that digital records provide, along with the help built into many software products and the fact that information is sent directly to HMRC from the digital records, avoiding transposition errors, will reduce the amount of tax lost to avoidable errors, according to HMRC. The latest tax gap figures suggest that £9 billion of tax is unpaid as a result of errors.

The government proposes to roll out MTD for all taxes. It announced in July 2017 that the roll out would be delayed with businesses not being obliged to keep digital records, or to update HMRC quarterly for taxes other than VAT until at least 2020.