MTD For VAT: Lessons and Reminders for ‘Second Stage’ Filers

This blog was last updated on October 3, 2019

7 August 2019 was a landmark in one of the most significant changes ever to occur in UK business-to-government VAT reporting.  The requirement to file VAT returns via HMRC’s new digital tax system Making Tax Digital for VAT (MTD) affected 1.2 million VAT registered taxpayers.  The vast majority file quarterly returns and were therefore expected to make their first MTD filings on or before 7 August, 7 September or 7 October, with most quarterly filers operating to quarters aligning to the calendar year (although a smaller number of monthly VAT filers  will already have done so by 7 June).  On their website, HMRC made the enterprising statement “HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world and MTD is making fundamental changes to the way the tax system works – transforming tax administration so that it is more effective; more efficient; easier for taxpayers to get their tax right”.

So, how did it all go?

Well, as perhaps expected, successful take-up from businesses to the new scheme was not as comprehensive as hoped by HMRC.  Perhaps foreseeing this, early in May they revised their VAT Notice about MTD to facilitate the recording of transactions relating to petty cash, suppliers and intermediaries, and charitable events.  They believed they had made it clear in news releases in June and July that applications to use the MTD interface would need to be made more than a week in advance in order to be successfully processed. 

Notwithstanding this, and despite news that more than ten thousand were registering every single day, some 120,000 taxpayers – in essence, around one in four believed to have had a 7 August filing deadline – failed to get their MTD connection up and running for August, thus missing the cut-off.  In many cases, this was due to late planning by the applicants, but HMRC also suffered its own technology glitches, such as handling automatic VAT payments via direct debit.  Realising there was a reputational issue at stake, and also heeding the impending possibility of a ‘No-Deal’ Brexit, HMRC confirmed they wouldn’t impose penalties where VAT returns were filed by the due date using the superseded method of the secure access web portal via the Government Gateway.

Months before this, HMRC had already backtracked on the timing of their requirement that businesses must have digital links in place between software programs (e.g. between an ERP and MTD bridging software, but also between different software programs handling information that ultimately ends up in the VAT returns) in order to provide a fully automated audit trail free of human intervention.  Instead, they announced a ‘soft landing’ period of up to a year for these links to be put in place, based on when the business was required to implement MTD, with no filing or record-keeping penalties being applied to those found not to have met these conditions in the interim.  To recap, these are:

1. First Stage filers: those required to file using MTD for accounting periods starting on or after 1 April 2019: digital links must be in place by the commencement of your first VAT return period that falls on or after 1 April 2020 onwards;
2. Second Stage filers: those required to file using MTD for accounting periods starting VAT periods starting on or after 1 October 2019: digital links must be in place by the commencement of your first VAT return period that falls on or after 1 October 2020.

Second Stage filers are often referred to as ‘complex’ businesses, as HMRC have determined certain features to their operations pose greater intricacy in VAT reporting than others: trusts; ‘not for profit’ organisations; local authorities; public corporations; non-established businesses; users of HMRC’s Annual Accounting Scheme; any VAT registrations mandated to make monthly Payments On Account to HMRC; and those registered in VAT groups.  Although a small number of the total taxpayer base (less than 1% of the total), Second Stage filers include some of the largest UK taxpayers.  Accordingly, the onboarding of this ‘second wave’ to MTD will be a true litmus test for this ambitious project.