The following update has been received from Sandy Adirondack, voluntary sector legal expert: www.sandy-a.co.uk.
To join the legal updates email list, contact firstname.lastname@example.org.
Making tax digital for VAT
New rules on “making tax digital” (MTD) for most VAT-registered organisations come into effect for VAT return periods starting on or after 1 April 2019, or on 1 October 2019 for organisations which have been given a deferral. MTD requires VAT-registered organisations which are not exempt from MTD to:
- record and preserve VAT records in a prescribed digital format using “functionally compatible software”;
- extract and calculate data held in those digital records to provide information and returns to HMRC;
- send returns to, and receive information from, HMRC via its application programming interface (API) platform.
Digital submission of returns via the API must start for the first return period starting on or after 1 April or 1 October. However, there is a one-year “soft landing period” for organisations to sort out digital recording, extraction and calculation of data for the returns. Organisations which are not deferred must start complying with the full requirements no later than the first VAT period starting on or after 1 April 2020. Deferred organisations must fully comply no later than the first period starting on or after 1 October 2020.
Organisations eligible for deferral include VAT groups, trusts, non-profit organisations (including charities) that are not set up as a company, and some other bodies. According to a Charity Tax Group update on 27 November 2018, HMRC has indicated that industrial and provident societies, friendly societies and companies set up by royal charter, letters patent or acts of Parliament are classed as “companies” and are thus not eligible for deferral, even if they are non-profit. It therefore seems that a VAT-registered charity or other not-for-profit organisation is eligible for deferral only if it is a charitable trust, charitable incorporated organisation (CIO), unincorporated association (whether charitable or not), or unincorporated social enterprise set up on a non-profit basis; or is in a VAT group or in one of the other deferral categories.
Sayer Vincent accountants say, “HMRC is aiming to write to all deferred businesses [which includes charities etc] by the end of February 2019. … Any charity or business wishing to rely on deferral must receive such a letter from HMRC. You cannot rely on thinking you are in the deferred group. Affected charities should contact HMRC if they are expecting to be deferred but do not receive an HMRC deferral letter.”
For VAT periods starting before 1 October 2019, deferred organisations will be able to continue filing VAT returns as usual and will not need to keep digital records.
A small number of VAT-registered organisations are exempt from having to comply with MTD for VAT. These include voluntarily registered organisations with turnover under the £85,000 threshold; organisations run entirely by practising members of a religious society whose beliefs prevent them using computers or are incompatible with the requirements in another way, and organisations for whom it is not reasonably practicable to keep business records or submit returns digitally, due to age, disability, remoteness of location or other reason.
If your organisation is registered for VAT and is not deferred or exempt, it should already be ready for this. If it should be registered, or soon might have to be, or is registered for VAT but has been deferred, these resources will get you started.
- Making tax digital for VAT for charities. Sayer Vincent accountants, January 2019, 10pp PDF: via https://www.sayervincent.co.uk/resources/technical/. This is also applicable to other not-for-profit organisations, and covers deferrals; exemptions; digital transaction records; digital links and the soft landing period; implications for organisations that already have a system compatible with MTD, don’t have compatible system, or have several different systems; and bridging software. Absolutely essential reading if your organisation is or may soon be registered for VAT.
- Making tax digital for VAT. Charity Tax Group: https://www.charitytaxgroup.org.uk/tax/vat/making-tax-digital-vat/. Covers sources of guidance; software and software suppliers; timeline; how to register for MTD; and what is required.
- Making tax digital for VAT. HMRC: https://www.gov.uk/government/collections/making-tax-digital-for-vat. Step by step guide; deferral; finding compatible software; signing up for MTD.
- Help and support for making tax digital: https://www.gov.uk/guidance/help-and-support-for-making-tax-digital. Links to YouTube videos and HMRC webinars.
VAT and Brexit
In the continuing uncertainty about what might or might not happen about Brexit, and when it might or might not happen, you will be glad to know that if the UK eventually leaves the EU with a withdrawal agreement, all current VAT rules will continue to apply during the transition period.
However, the vote in Parliament on 13 March that there should never be a no deal Brexit is not legally binding. So if a withdrawal agreement is not in place by 11pm on 29 March, or when any extension to Article 50 postponing the exit date comes to an end, a no deal exit could still occur. If this happens, at the moment of exit the VAT and customs rules on trade with EU countries will immediately become the same as the UK’s current rules on trade with non-EU countries. A “hard border” between the UK and the EU will involve customs declarations when goods move between the UK and the EU; import VAT or customs duties on imports from the EU to the UK; and having to pay VAT or customs duties on exports to the EU. The same will apply in relation to other countries with which the EU has free trade agreements; the UK will no longer be party to those arrangements. A no deal Brexit will also involve changes to distance selling rules, changes to rules on sales of digital services; and more.
Any organisation exporting goods to or importing goods from the EU will need, in case of a no deal exit from the EU, a UK economic operator registration and identification (EORI) number. This is explained in the government publications below.
The Irish border
The government has said that special arrangements will be made to avoid a hard border between Northern Ireland and the Republic of Ireland. Its no deal guidance in August 2018 said:
“The UK government is clear that in a no deal scenario we must respect our unique relationship with Ireland, with whom we share a land border and who are co-signatories of the Belfast Agreement. The UK government has consistently placed upholding the Agreement and its successors at the heart of our approach. We recognise the basis it has provided for the deep economic and social cooperation on the island of Ireland.
” It is the responsibility of the UK government to continue preparations for the full range of potential outcomes, including no deal. In such a scenario, the UK would stand ready to engage constructively to meet our commitments and act in the best interests of the people of Northern Ireland, recognising the very significant challenges that the lack of a UK-EU legal agreement would pose in this unique and highly sensitive context. This would include engagement on arrangements for land border trade. We will provide more information in due course.
“The Irish government have indicated they would need to discuss arrangements in the event of no deal with the European Commission and EU member states. We would recommend that, if you trade across the land border, you should consider whether you will need advice from the Irish government about preparations you need to make.”
Unless I have totally missed something, I haven’t seen anything about what those no deal arrangements for the Irish land border would be.
Organisations which provide goods or services, including digital services, to the EU, or receive them from those countries, should be aware of the potential implications of a no deal Brexit, and have the necessary arrangements in place in case they are needed – or at least be aware of what those arrangements will need to be. These are starting points.
- VAT for businesses if there’s no Brexit deal. HMRC, 23 Aug 2018: https://www.gov.uk/government/publications/vat-for-businesses-if-theres-no-brexit-deal/vat-for-businesses-if-theres-no-brexit-deal. General guidance on VAT.
- Accounting for import VAT if the UK leaves the EU without a deal. HMRC, 6 March 2019: https://www.gov.uk/guidance/accounting-for-import-vat. Covers issues you probably never even thought about, like import VAT on goods already in transit from the EU to the UK at 11pm GMT on 29 March 2019 (or, presumably, any other no deal exit date).
- Trading with the EU if there’s no Brexit deal. HMRC, 23 August 2018: https://www.gov.uk/government/publications/trading-with-the-eu-if-theres-no-brexit-deal. General guidance on customs duties. This page also has a link to what will happen in relation to free trade agreements with other countries, such as Switzerland and Turkey.
- Brexit: Government sets out its ‘no deal’ plan for VAT. BDO accountants, 11 Feb 2019: https://www.bdo.co.uk/en-gb/insights/tax/vat-and-indirect-taxes/brexit-government-sets-out-its-no-deal-plan-for-vat. Good summary.
Another VAT intro resource
Following on from the basic VAT resources in update 1909, Gareth Morgan has asked me to mention his Charity treasurer’s handbook, in particular chapter 11 which covers social enterprise, charity trading and tax. It has succinct explanations of VAT, and how the difference between a grant and a contract can affect not only the VAT situation, but also whether the income is restricted (with all of it having to be used for the specified activity or service) or unrestricted (with it being able to be used for other purposes, provided the specified activity or service is delivered to the agreed specification). This in turn affects how the income is shown in the charity’s accounts, and the use of any excess if the activity or service can be delivered at lower cost than the amount received. The chapter also includes a new section on charities sub-contracting (or sub-granting) to other charities in so-called partnership arrangements and shared services. I’m very happy to recommend the book as a whole, not just chapter 11.
- The charity treasurer’s handbook, 5th edition. Gareth Morgan, Directory of Social Change, 2017, 256pp. Book £16.95; downloadable PDF, epub (suitable for iPhone or Android mobiles and tablets) or mobi (for Kindle) £9.60 + VAT: https://www.dsc.org.uk/publication/key-guides-the-charity-treasurers-handbook/. All formats are available from DSC, or the book is available from me for £16.95 post-free.