Tax Notes logo

U.K. Delays Phase 2 of Making Tax Digital for VAT Amid Pandemic

Posted on Mar. 31, 2020

HM Revenue & Customs is giving businesses extra time to comply with requirements under the second phase of a key VAT compliance initiative because of the coronavirus crisis, a move taxpayers are likely to welcome.

An HMRC spokesperson confirmed the Making Tax Digital (MTD) delay in a March 30 statement, which Tax Notes understands is nearly identical to an email sent to taxpayers earlier in the day.

“We understand that the impact of COVID-19 is creating extremely difficult times for all, and we are committed to helping in every way possible all those businesses facing unprecedented challenges,” the statement says.

“Therefore, we are providing all MTD businesses with longer to put in place digital links between all parts of their functional compatible software,” HMRC added. “This means that all businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place.”

VAT-registered businesses with turnover exceeding the £85,000 VAT threshold are required to sign up to the MTD service, file quarterly VAT returns electronically using MTD-compliant software, and keep digital records. The MTD rules, which apply to VAT, income tax, and corporate tax, took effect April 1, 2019, and are meant to streamline tax administration by requiring most businesses and self-employed taxpayers to manage their tax affairs digitally.

HMRC designated a soft-landing period for businesses to adapt to the changes, requiring all in-scope businesses to submit VAT returns using the new MTD system and store digital accounting records. That transition period, set to end for many companies on April 1, 2020, was also meant to give businesses enough time to digitally link all parts of their software programs, applications, or products used to keep digital records in line with MTD requirements.

Originally, the soft-landing period was April 1, 2019, to March 31, 2020. However, that timeline was different for some businesses that received specific directions from HMRC to start following MTD rules for VAT periods starting on or after October 1, 2019. For those businesses, the soft-landing period was October 1, 2019, to September 30, 2020.

“It’s a very sensible delay given all the disruption to the economies, and many businesses facing an existential crisis,” Richard Asquith, vice president of global indirect tax for Avalara, told Tax Notes. “It would have been a major surprise if it hadn’t happened.”

However, Asquith expressed regret that the MTD project had been “delayed or watered down” too many times in the past three years. “HMRC and the government would have been able to launch much more targeted and efficient tax help if it had been introduced as first envisaged by George Osborne, the then-Chancellor, in 2015,” he said, noting the year the MTD project was first announced.

Tina Riches, chair of the joint Chartered Institute of Taxation and Association of Taxation Technicians Digitalization and Agent Services Committee, also welcomed HMRC’s decision to delay the digital linking requirements, noting that phase 2 of the project “was going to create quite a headache” for many businesses.

While some companies had been working on putting digital links in place, others are not as far along, according to Riches. The coronavirus pandemic has complicated matters because employees are now working remotely without the same kind of access to their systems, she added.

“For some firms, it would have been really difficult to have it all working by April,” Riches said, adding that HMRC also has a lot on its plate after the government announced so many new measures to deal with the economic fallout of the pandemic. “I was really pleased when I saw they had . . . agreed to defer it for another year.”

Businesses that haven’t yet adapted their systems to comply with MTD phase 2 requirements should figure out the best time of year to do it, Riches said. However, some businesses are probably worrying if they’ll even exist next year, according to Riches. “Changing their systems may be the furthest thing from their minds,” she said.

Copy RID