Digitizing VAT in the UK (Part Two)

Digitization has affected the tax process in most countries to the point that there is a need for very different taxpayer behavior than it was a few years ago. We are now introducing UK tax digitization.

The first part of the series You can read it here.

Introducing the MTD was not only one step closer to the UK, but it also had several pre-defined milestones in the process.

The first target date was April 1, 2019, when the program requirements and management method requirements came into effect. However, this did not affect all taxpayers. The first filter was and is still in effect relating to the taxable turnover amount of the taxable person. Accordingly, the MTD rules apply to taxable persons who have reached the UK VAT registration threshold, which was £85,000 at the time and has not changed since. In other words, if the taxable person has not exceeded this level since then, then he does not have to comply with the rules of the MTD in any way.

The rules initially affected monthly taxpayers, followed by quarterly returns. It is interesting to note that in the country, when we talk about quarterly returns, we not only have to think about the calendar quarter that we know, but there is also a slippery quarter, which can mean February-April or March-May for the first quarter.

In the first year of filing, the MTD rules always became in effect for taxpayers when the full term of the return period was on or after 1 April 2019. There was also a separate group of collective taxpayers who entered the system as of October 1, 2019 on a schedule similar to “ordinary” taxpayers.

MTD rules did not automatically become mandatory for taxable persons, but each taxable person had to manage what is called a subscription. The subscription also had its own rules about who could register in the first days after the last “old” method of submission, and what was the last date before they could still meet the requirements.

The MTD rules were supposed to have been completed by April 1, 2020, but the first wave of COVID swept it away and pushed it a year later, to April 1, 2021. The changes that were to be made as of April 1 last year were not as big as the previous ones, But much deeper changes have taken effect.

As of April 1 last year, the scope for human intervention can be very limited and legal changes taxpayers can continue to make are regulated.

Before mentioning some of the allowed changes, let’s take a look at the exact items that you should avoid. There are four contents, the first of which is a change in the performance date, the second is the tax base, the third is the amount of value added tax, and finally the tax rate specifically deductible from the value added tax charged. The taxpayer can modify these “manually” only for valid reasons.

The range of permissible modifications, as I mentioned earlier, is very narrow. The most common changes are mostly related to imported goods, with the IRS providing the data on a monthly basis. Usually two types of statements are received from the tax authority, depending on how the taxpayer previously submitted a statement on the payment of customs duties. If you apply reverse charge rules to this type of transaction, the taxpayer can download the certificate from the IRS system. Conversely, if the taxable person pays VAT at the border, the authority will mail the certificate evidencing the VAT paid. These certificates can still be calculated manually.

The rules also allow taxable persons who carry out both exempt and taxable activities to adjust the deducted VAT after deducting the discount rate. Adjustments that become necessary due to the private use of certain company assets are also permitted.

It will be possible to include the permissible adjustments approved by the legislature for a long time, but among them there are also those of the British tax system, which are not present in the Hungarian tax system.

Finally, let me conclude with the latest development, which states that so far only taxable persons whose sales number has exceeded the threshold for VAT registration have been required to register under the MTD rules, but as of April 1 of next year, even the smallest taxable persons will be Required to apply the rules.

The author is Peter Molnar, an independent tax advisor.