Making Tax Digital for Business: VAT
HMRC is phasing in its landmark Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system. Regulations have now been issued which set out the requirements for MTD for VAT. Under the new rules, businesses with a turnover above the VAT threshold (currently £85,000) must keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software.
The new rules have effect from 1 April 2019, where a taxpayer has a ‘prescribed accounting period’ which begins on that date, and otherwise from the first day of a taxpayer’s first prescribed accounting period beginning after 1 April 2019.
HMRC is piloting MTD for VAT during 2018, ahead of its introduction in April 2019.
Keeping digital records and making quarterly updates will not be mandatory for taxes other than VAT before April 2020, although businesses below the VAT threshold which have voluntarily registered for VAT can opt to join the scheme.
As with electronic VAT filing at present, there will be some exemptions from MTD for VAT. However, the exemption categories are tightly-drawn and unlikely to be applicable to most VAT registered businesses.
Even though MTD is not introduced until March 2019 the reality is that businesses may need to ‘go live’ in advance of this. If an impacted business does not have compatible software they will need to migrate to an appropriate system to meet the MTD requirements and it is unlikely that any business would want to do this mid year and therefore the ‘go live’ is actually the start of their next financial year. For those that are already using compatible software they will likely need to review their VAT return process and VAT code allocation to ensure that they can meet the new digital requirements.
Corporation tax rates
Corporation tax rates have already been enacted for periods up to 31 March 2021.
The main rate of corporation tax is currently 19%. The rate for future years is:
- 19% for the Financial Years beginning on 1 April 2018 and 1 April 2019
- 17% for the Financial Year beginning on 1 April 2020.
Class 2 and 4 National Insurance contributions (NICs)
Class 2 NICs will be abolished from April 2019. The Chancellor confirmed in March 2017 that there will be no increases to Class 4 NICs rates in this Parliament.
Intangible fixed assets
The Intangible Fixed Assets regime, which was introduced from 1 April 2002, fundamentally changed the way the UK corporation tax system treats intangible fixed assets (such as copyrights, patents and trademarks) and goodwill. As the regime is now more than 15 years old, the government would like to examine whether there is scope for reforms that would simplify it and make it more effective in supporting economic growth.
The government is seeking stakeholder views and evidence on specific aspects of the regime, including:
- the impact of the 1 April 2002 commencement rule and the restriction on goodwill and customer related intangibles on the complexity and competitiveness of the regime
- the use of the election for a 4% per annum fixed rate of relief
- the impact of the regime’s de-grouping rules on mergers and acquisitions. Read the consultation here.
Corporate tax and the digital economy
The government published a ‘position paper’ at Autumn Budget 2017, setting out its view on the challenges raised by the digital economy. In summary, the digital economy has put the corporate tax system under pressure, creating imbalances between those firms with and without a physical presence. Certain digital businesses, like social media platforms or search engines, create value in ways that are not reflected in existing tax rules. The government’s view is that these businesses rely on the active participation of UK users but existing international rules do not take account of this value in determining how much of their profit is subject to UK corporation tax.
This is a long term project. In the meantime there is a need to consider interim action. Of the options that have been put forward, the government thinks the most attractive is a tax on the revenues that businesses generate from the provision of digital services to the UK market.
An updated position paper has now been issued which seeks to address and develop the questions that have so far been raised. This includes:
- setting out a more detailed explanation of how user participation is considered to create value for certain digital businesses
- a possible approach for incorporating user-created value into the international tax rules and
- some of the important questions regarding the detailed design of a revenue-based interim measure.
Cash and digital payments
With cash use falling from 62% of all payments in 2006 to only 40% in 2016, the government will consult and seek evidence about how the role of digital payments is to fit into the growing digital economy. This will include identifying what further work can be done to remove barriers to digital payments. At the same time the government acknowledges that cash must remain accessible and secure, especially for the 2.7 million people entirely reliant on cash payments. It is also determined to further strengthen the crackdown on the use of cash as a method of money laundering and tax evasion.
The government has launched a call for evidence on the role of online platforms in ensuring tax compliance by their users. The types of online platforms the government is principally interested in are platforms:
- that allow people to earn money from spare resources such as cars and spare rooms
- that allow people to use their time to generate extra income
- that connect buyers with individuals or businesses offering services or goods for sale.
The government wants to ensure that, where people have tax obligations because of these activities, it is easy for them to comply. The government considers that some do not fully understand or are unaware of their tax obligations. The focus of the work will be on direct taxes. Read the consultation here.
The spring statement has seen the release of two important VAT consultation papers.
VAT registration threshold: call for evidence
The first is in relation to the UK VAT registration threshold which is currently £85,000. In November 2017 the Office of Tax Simplification examined the current VAT registration threshold and recommended that the government should examine the current approach to the level and design of the VAT registration threshold. This consultation paper is called ‘a call for evidence’ and seeks to examine how the threshold might currently affect business growth, the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering. It will also consider possible policy solutions, based on international and domestic examples. The questions asked throughout the document of businesses are summarised in Chapter 5 and the consultation closes on 5 June 2018. Read the consultation here.
VAT collection - split payment
The second consultation is in relation to challenge caused by e-commerce on the VAT system due to certain businesses failing to charge VAT when they are supposed to. The UK government has already taken action in this area by introducing joint and several liability rules to hold online marketplaces responsible for the unpaid VAT of sellers on their platforms but there is still more that can be done. This consultation seeks to look further into the VAT split payment, in particular how technology within the payments industry could be used to extract VAT in real time and deposit it with HMRC to reduce the opportunity for non-payment of the VAT by the overseas merchant. The view from previous consultations was that this is technologically possible and therefore this consultation has been launched to further explore this. This consultation is open until 29 June 2018. Read the consultation here.
Two interesting developments aimed at closing the tax gap!
VAT fraud in labour provision in the construction sector
The government will pursue legislation to shift responsibility for paying VAT along the supply chain with the introduction of a domestic VAT reverse charge for supplies of construction services with effect from October 2019. The long lead-in time reflects the government’s commitment to give businesses adequate time to prepare for the changes. Read the consultation here.
Extension of security deposit legislation
The government announced at Autumn Budget 2017 that it would introduce legislation to extend the scope of existing security deposits legislation to include corporation tax and Construction Industry Scheme deductions, with effect from April 2019. A consultation has now been published inviting comments on the how to implement the changes. Read the consultation here.
Legislation will allow HMRC to require high risk businesses to provide an upfront security deposit, where it believes there is a serious risk to the revenue. Currently HMRC has powers to require a security deposit in respect of other taxes such as VAT and Pay As You Earn.