Compliance and Making Tax Digital
The world of VAT is one which never stays still for long. What is subject to VAT constantly changes, the rate applicable moves around and there are new interpretations and rules related to where VAT is due. It’s a constant moving beast and one that businesses must keep on top of.
The most common aspect we see businesses grappling with is whether to charge VAT and where to it is due – this is important because determining whether to charge it and where affects pricing and hence competitiveness. The next question is around recovering the VAT incurred on costs, as where this is possible directly affects the bottom line. A more recent challenge though, and one that looks like getting more difficult, is the management of those positions – pulling together the data that contains all the relevant information in order for a VAT return to be filed. It’s an often-overlooked part of VAT but having an effective compliance function, and clear understanding of your business’ data, is really the key to getting the VAT right.
The compliance evolution
For many years the submission of a VAT return involved the filling in of a physical return provided by the tax authority. In the UK that meant nine boxes of summary data inked by pen and put in the post, until more recently it moved to a digital form. That was also pretty much the norm across the EU albeit some countries had many more data requests and boxes to complete.
In 2019 Making Tax Digital (MTD) was introduced by HMRC. It was hailed as a brave new step into the digital world that would help businesses and individuals. VAT was the first tax to adopt MTD, with new requirements including businesses having to keep digital records and submit VAT returns not by filling in online forms but via API links. You can read more about MTD here.
There was however no requirement in the UK MTD rules for any form of transactional reporting or further information to be supplied beyond that which was previously submitted. Therefore MTD is really not very onerous when compared to other tax authorities’ requirements, some of whom want real time uploads and detailed analysis of transactions. That the rollout of MTD in the UK for other taxes has been subject to a fairly constant series of delays may have something to do with the underwhelming impact seen for VAT.
However, many businesses will be liable to file not just UK VAT returns but those in other territories because they will be making sales to customers based or undertaking activities outside of the UK. This means there is often a need to file additional returns and hence meet the obligations they bring. For example, transactional reporting, the issuance of e-invoices and detailed breakdowns of the VAT due at different rates.
There is also a need to consider the increasing number of other indirect reporting or compliance obligations. Many of these are focussed on areas where cross border transactions take place and include import VAT certification, preference/origin evidence, Plastic Packaging Tax (PPT) and Carbon Border Adjustment Mechanisms (CBAM).
Don’t be overwhelmed!
Managing all of these obligations can seem daunting but with some sensible planning and methodical steps that position can be changed. Doing some, or all of below will assist any business with managing its compliance obligations.
- Map supply chains
A basic starting point but often overlooked, ensuring you know how income is generated should always be the starting point. Whether it’s a movement of goods or the supply of digital content, mapping how that supply is made and noting the details of parties involved will allow for the VAT due on the income generated to be confirmed alongside identifying other matters to manage (i.e. export documentation, regulatory obligations, etc). - Review data sources
There will be many sources of data available to businesses. For a small e-commerce retailer that could include details on sales gathered via a website (i.e. Shopify), delivery information from the courier and AP/AR ledgers in the accounting package. Larger businesses will have the same but maybe multiple versions via different platforms plus, if they are involved in the cross-border movement of goods, documentation needed to evidence origin/taxes/declarations and other points.
What’s essential is to understand these data sources so the correct information needed to file returns can be collected. That means, as one example, knowing what currencies are used in reports so it can be checked that tallies with the actual sale made and a reporting obligation is made with the right values. For many businesses they will need to gather data from outside of the traditional sources such as ERP systems and that means those responsible for tax will have to be across and communicating with many different departments. - Confirm filing obligations
As mentioned above, many businesses trade with customers located outside the UK. This can quickly lead to multiple filing obligations being created. Understanding and making a note of what these are, the data needed to complete them and importantly deadlines for filing and making payments is critical. Once this is completed then it becomes possible to allocate and manage the work that needs to be undertaken to ensure the business is compliant. This means in some cases outsourcing the work where the business cannot complete those actions itself.
How we can help
We manage the UK VAT reporting obligations of over 175 clients, plus EU reporting via the One Stop Shop (OSS) and Import One Stop Shop (IOSS) for many more. We use MTD approved software to ensure compliant UK submissions allied with review of invoices and the data trends by experienced VAT practitioners. We make sure that we are on hand to help businesses with new obligations they face or to understand changes to their operations.
The next big round of VAT changes soon to take place are listed out below. Any businesses involved with these areas should think about reviewing their impact and how they will manage them as soon as possible, in order that they can prepare in a managed way.
Changes to be aware of:
- EU Place of supply for online presentations and webinars in – 2025.
- Marketplaces in the EU taking on reporting obligations for all businesses trading B2C (not just non established ones) – 2026.
- Expansion of the OSS to allow for businesses to report EU movements of their own goods – 2026.
- UK CBAM – 2027.
- Abolition of the IOSS threshold from its current €150 level – 2028.c
The changes for 2026 should be ratified in May 2024. That will give businesses just over 18 months to plan for their impact. If you would like further information on how we can help you with above, please contact Rob Janering, or your usual Crowe contact.
