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UK Making Tax Digital for VAT 1 April 2021 Phase 2

The UK’s HMRC is set to go ahead with Phase 2 of Making Tax Digital for VAT on 1 April 2021. This will require UK VAT registered businesses over the UK VAT registration threshold of £85,000 to comply with three new requirements: Digital Bookkeeping; Digital Journey; and a new VAT penalty regime. Note: the UK VAT penalty regime will change 1 April 2022

Phase 1, the requirement to file UK VAT returns from API-enabled software, including spreadsheets, was launched on 1 April 2019. Phase 2 was intended for 1 April 2020, but was delayed 12 months to April 2021 due to the COVID-19 pandemic. Our VAT Filer can accurately populate the UK VAT return, and file under the MTD 2019 and 2021 rules.

1 Digital Record keeping

The biggest change will be felt by hundreds of thousands of small businesses that keep their records in summary Excel or on paper. The 2020 changes oblige these businesses to digitalise recording of supplies received and made, including time of supply, value and VAT rate. So aside from sales, this extends to purchases, stocks and fixed asset transactions. This will likely lead to the small businesses buying some basic accounting package for the first time – which should be MTD compliant for filing, too. But they may stick with bridging software for MTD to maintain data if it still is able to transfer the data to HMRC without any manual adjustments or intervention.

2 Digital Journey

2 The second change will impact most large to enterprise-sized businesses. From April 2020, transfer of data between functional compatible software (invoice and accounting systems etc.) must be done using digital links. This means no manual inputting, including manipulation, consolidation or error corrections in spreadsheets. That includes the ending of the ‘cut and paste’ concession allowed for the soft-landing. However, if they can ensure an interrupted digital journey from their accounting or invoices systems to the bridging software and then onto HMRC, they can continue on this route. Detailed off-software calculations, such as partial exemption, will remain exempted from digital journey obligations.

This is the one that will hurt businesses with multiple accounting systems or group accounts. They typically manually consolidate all the numbers for the return in a spreadsheet. They will have to find a way – heavy investment or very complex Excel macros – to pull this all together without human intervention. The answer may be integrating all systems or investing in a VAT reporting software that digitally extracts, merges, allows digital adjustments and then files via the MTD API. HMRC has recently announced the option to apply for a further deferment beyond the ending of the soft-landing period. Businesses with complex or legacy IT systems may apply for an extension; but cost alone is not sufficient reason to issue.

3 VAT Penalties

To give teeth to the whole MTD regime, the suspension of penalties on late MTD filings ends, too. These are on a cumulative basis, based on the number of offences in the past 12 months. This can reach 15% of the VAT due, plus fines of up to 100% of undeclared VAT as a result of careless or deliberate inaccuracies.

In short, the hard work and software investment will be for next April. And it’ll affect hundreds of thousands of businesses. If this year was just a change of lightbulb, 2020 is redoing the whole electrics.

Europe e-invoicing and live reporting

Country Date Comments (click for details)
EU e-invoice proposals 2028 Digital reporting and e-invoicing harmonisation
Albania Jan 2021 Authorised e-invoice software and pre-clearance
Belgium 2024-25 Phased introduction of B2B e-invoices
Bulgaria 2023 Public consultation on pre-clearance model e-invoice
Denmark 2024 Digital record keeping obligations
Finland Apr 2020 Customer option to require B2B e-invoices
France Jul 2024 E-invoicing and e-reporting for B2B and B2C
Germany 2024 (?) New government e-invoice 'as soon as possible' to fight fraud
Greece Oct 2021 myData summary invoice and ledger reporting
Hungary Jul 2018 RTIR live invoice reporting. No govt pre-clearance required
Italy Jan 2019 Pre-clearance SdI e-invoicing
Ireland TBC Public consultation underway
Latvia Jan 2025 B2B e-invoices based on PEPPOL
Lithuania ? E-invoicing platform being scoped
Poland Jan 2024 Polish mandated e-invoicing
Portugal Jan 2024 Certified invoicing software for non-residents
Jan 2024 ATCUD digital invoice signature for non-residents
Romania Jul 2022 RO e-invoicing implementation
Russia TBC Extension of Traceability Model to B2B on hold
Serbia Jan 2023 B2B e-invoicing
Slovakia 2024 B2B and B2C e-invoice rollout
Slovenia 2023 ? e-SLOG B2B proposal stalled
Spain 1 Jul 2017 SII live invoice and book reporting
Spain 2 2024 Pre-clearance B2B e-invoices; supplement to SII
Sweden 2024? PEPPOL based mandatory e-invoicing
Turkey Jan 2014 e-invoice e-Fatura and e-Arşiv
UK Apr 2022 MTD for VAT extended to 1.1million taxpayers

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