Significant VAT Changes on the Horizon for Companies Operating in the UK

This blog was last updated on March 11, 2019

Even though the year is just underway, 2018 is already bringing a flurry of activity around indirect taxation in the United Kingdom. While much of the detail still needs to be sorted, one thing is clear – significant compliance changes are on the horizon and companies operating in the UK will need to adapt. Specifically, Her Majesty’s Revenue and Customs (HMRC) announced that along with Brexit, several other major changes will be ushered in to re-design the indirect tax compliance landscape. The two largest announcements being:

1. The Making Tax Digital (MTD) initiative, and
2. The Parliamentary Taxation (Cross-Border Trade) Bill 2017-19.

These changes will undoubtedly impact businesses that are registered for value-added tax (VAT) in the United Kingdom, and companies will need to take action to maintain their compliance.

Making Tax Digital (MTD)

HMRC announced that the MTD initiative will be in effect for businesses registered for VAT in the United Kingdom, separate from whatever outcome arrives from the Brexit negotiations with the European Union; Starting in April 2019, (HMRC has to publish regulation until April 2018) here’s what’s known about MTD, all businesses must:

• Integrate functionally compatible software (i.e. software which connects the business to HMRC systems) into all VAT-related business matters.
• Maintain data related to VAT determination (current and historically back six years) in a digital format that is compatible with the HMRC portal.
• Submit all VAT returns electronically – the VAT return should be generated through the compatible software and the reporting should derive from the digitally stored data.

VAT Registered Businesses must consider how they will support these requirements. For most, the compliance burden will increase given the expanded digital accountability requirements. Further, many businesses will need to invest in technology to meet the “functionally compatible software” standard.  

Cross-Border Trade Post Brexit

As the timeline towards true Brexit draws nearer, the UK Parliament is debating legislation that will dictate how Britain interacts with the EU (and vice versa) for tax. In short, there will likely be a physical and financial border that separates the UK from the EU, and the tax ramifications of this re-emerging fiscal frontier are significant.

For instance, Parliament is currently debating a “post-Brexit” bill that would greatly alter how businesses account for VAT when goods are imported into the United Kingdom. The Taxation (Cross-Border Trade) Bill 2017-2019 is currently being debated in the House of Commons and one of the more contentious proposals in the bill would require the importer of record to pay import VAT prior to goods entering free circulation in the United Kingdom.

Although still early in the process, the proposal would create a cash-flow disadvantage for importer (when importing from an EU member state) as the bill does not overtly allow for any special import schemes, such as deferred accounting. However, language in the bill that allows HMRC to create regulations that could ameliorate this burden.

This is only one example of how tax compliance may change post Brexit. The complete picture, at this point of time, is far from clear. While Parliament and HMRC work to flesh out the fine details, businesses will need to cope with uncertainty of not knowing what the future holds. In this type of regulatory environment, the importance of deploying intelligent and adaptable compliance solutions becomes paramount.