Editor’s comment: 25 days and counting
The deadlines for Brexit and the overhaul of VAT reporting under Making Tax Digital are uncomfortably close, while the risk of reverting overnight on 29 March to third country status for exports and audits, are just some of the bigger unknowns for business, tax advisers and accountants, says Sara White, editor of Accountancy Daily
4 Mar 2019
There are two significant deadlines looming this month; so far there is only shaky progress on the EU Brexit deal with continuing uncertainty over the negotiations as the end date of 29 March 2019 for UK departure looms. Another meaningful vote is slated for parliament next week but there appears to be little confidence that a final deal will be signed before the very last minute.
The moment B-Day is over, HMRC will see its criticised overhaul of VAT filing come into force with the introduction of mandatory digital reporting for VAT.
Already one year late, the latest announcement by HMRC stated that VAT filers will be able to use cut and paste, instead of digital reporting, for one year, equivalent to a soft delay of digitisation.
Due to quarterly timings for reporting the first real start date for Making Tax Digital for VAT will be 1 July onwards. At the same time, there will be a soft landing period with no penalties for year one.
The plans for digitisation of business tax were envisaged long before the decision to hold a referendum on Brexit so it is just unfortunate timing that both major events happen within days of each other.
MTD overshadowed by Brexit
In normal times, the introduction of mandatory Making Tax Digital for VAT from 1 April would be a major event for businesses and sole traders, but this year it is rather overshadowed by Brexit.
Under the new regime all VAT registered businesses over the £85,000 threshold will have to file using software, not the usual nine number entry process. For the many smaller businesses and sole traders not using accounting software, there are some Excel extensions around. These are available for free, filling the gap after HMRC canned any plans for free software years ago, instead relying on the private sector.
Perhaps a sign of austerity, and a reasonable assumption that the tax authority is not a software developer so should not be dabbling in IT. More worrying for HMRC is that 1.17m businesses still need to sign up to Making Tax Digital. As of 1 March more than 97% of businesses were off the grid.
But don’t be fooled, Making Tax Digital is here for the long haul and it is just phase one of a long-term joint government and HMRC tax strategy. Although the VAT element was always going to be the easy part of digitisation (well, within reason), even that has created problems with around 20% of potential filers facing a delay until October before they can even start to file.
The main objective for HMRC is to close the tax gap with a reduction in mistakes and errors on VAT returns. The latest figures showed an estimated £33bn tax gap in 2016-17, amounting to 5.7% of total theoretical tax liabilities and the same level as the previous year, with small businesses responsible for 41% of the tax not collected. VAT evasion alone accounts for more than a third of the tax gap at £11.7bn. If this gap could be closed, this would make a significant contribution to a post-Brexit Exchequer.
This number is uncannily close to the estimated gross contribution to the EU (after the rebate) of £13.bn and would help pay towards the Brexit divorce bill of £38bn, payable in the event of a deal. The UK has been the third or fourth largest contributing country to the EU budget in recent years, and of the 28 EU members is one of 10 to contribute more than it gets back in receipts.
Arguably Brexit has put a brake on a wider rollout of digital reporting. While VAT reporting goes ahead, there is still no timetable for the rollout of the digital or quarterly reporting to corporation tax, income tax and so forth. This is unlikely to get the go-ahead for at least two more years, once again hitting the end of the Brexit transition period. So, Making Tax Digital will always be in the shadow of Brexit.
Of course, Brexit could well be delayed with a potential extension to Article 50 depending on the outcome of various parliamentary votes, EU flexibility and progress on a stalling negotiation process. But despite pleas to delay digital VAT filing, HMRC’s new VAT reporting regime will go ahead from the start of April.
Exporters and MOSS post-Brexit
VAT compliance may seem of minor importance when pitted against the backdrop of Brexit but the two are inextricably linked as VAT is an EU construct. It affects the majority of exporters to EU28 member states.
Inevitably the lack of progress on a final Brexit deal has also had an impact on HMRC, with the authority preparing to put on extra agents to deal with Brexit-related queries as exporters brace for a period of uncertainty.
For accountants and tax practitioners, there is a number of critical VAT compliance issues to consider, the first being the effective ending of the UK’s access to the Mini One-Stop Shop for VAT (MOSS) if we were to crash out of the EU. Effectively the UK becomes a third country if there is no deal.
HMRC has already written to thousands of UK, US and other international sellers of digital services to warn them to VAT register in another EU state in the event of a no-deal Brexit. This covers their sales of e-services, apps, streaming media, online gaming and dating, e-books and software to EU consumers. At the same time, letters have been sent to over 145,000 VAT registered UK businesses telling them to sign up for an economic operator and registration identification (EORI) number to enable continued pan-EU trade. There was also £11m in government funding to help with transition compliance issues over import and export declarations.
Brexit has even delayed the mailing of self assessment penalty forms by a month until after B-Day as HMRC has said it will not be able to handle the volume of Brexit problem calls at the same time as providing self assessment phone support.
Another unwanted discovery in the fine print of the statutory instrument amendments to the Companies Act 2006 in the event of a no-deal Brexit is that the status of limited liability partnerships registered in certain EU member states by UK stakeholders could also be put at risk without a reregistration process. This is the case in jurisdictions that operate the ‘real seat’ principle of incorporation, such as Germany.
Is it surprising that the majority of businesses are just sitting and watching the next 25 days until Brexit?
Let’s face it, anything could happen. Making Tax Digital will be plain sailing in comparison.
About the author
Sara White is editor of Accountancy Daily