UK VAT update: Her Majesty’s Revenue and Customs' implementation of its Making Tax Digital initiative

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Overview

Our colleagues at PwC UK have informed PwC US that Her Majesty’s Revenue and Customs (HMRC) are implementing their “Making Tax Digital” (MTD) for business strategy, which will affect all law firms that are registered for VAT in the UK. The first tax to be affected by MTD will be UK VAT. This news alert will summarize the key dates and potential actions in respect of the MTD agenda.

 

Requirements of HMRC’s MTD initiative

HMRC has informed PwC UK that MTD is still progressing at pace (despite some media reports in the UK to the contrary) with an implementation date of April 01, 2019. From April 01, 2019, all UK VAT-registered businesses with a turnover in excess of £85,000 will be required to meet new requirements in preparing and submitting their VAT returns using HMRC's online portal. 

As part of HMRC’s MTD initiative, HMRC considered the use of spreadsheets within the VAT compliance process. Law firms that operate in the UK will have obligation to ensure that their spreadsheets meet MTD requirements and adhere to best practices.

The followings are key dates and potential actions in respect of the MTD agenda.

 

MTD key dates

By April 2019

Law firms must submit their VAT returns digitally using an application-programming interface (API). Manual entry of the VAT return figures from spreadsheets to HMRC's online portal, for example, will no longer be allowed.

Law Firms must also maintain records (certain transactions, VAT accounts and summary of outputs) digitally for VAT only. Some data will already be in existing systems; however some will be in spreadsheets. These both count as digital, so for most law firms this will be a minor change. Law firms should consider reviewing their data flows and perform a spreadsheet audit to ensure there are no MTD gaps.

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By 2020

Law firms will need to have a clear 'digitally linked' audit trail from the transaction records to the VAT return filing. This is a marked shift and will require manual transpositions to be removed from the VAT process. Law firms should consider performing a readiness review and/or a data integrity review to ensure that the data being entered is correct in the first instance, and consider introducing processes that reduce manual intervention and adjustments after the end of the relevant VAT return date.

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Beyond 2020

As set out in HMRC's 2016 papers, HMRC will merge this MTD approach to other taxes, consider increasing the scope of digital records, and require greater disclosure of transactional level data. HMRC's ultimate goal is to access data remotely, then conduct VAT, and tax audits via a number of analytical checks.

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MTD - Immediate actions for consideration by law firms that operate in the UK

  • Conduct a readiness review to understand your firm’s VAT processes; walk through your tax sensitive data’s digital journey from source to submission, while assessing and identifying gaps and resolving how best to close them. This will also determine the type of API that is required to digitally link your Firm’s spreadsheet figures to HMRC's online portal.
  • Conduct a transaction analytical review by running a series of predefined and custom VAT tests and exception reports across your business’ sales and purchase data. This exercise mirrors HMRC’s audits in this space and will identify MTD gaps, potential compliance errors and areas where your law firm’s data quality needs to be improved.
  • Conduct a digital strategy for VAT/tax in the form of a strategic workshop to discuss data and technology strategy covering the UK and beyond, as well as the tax function for the future.

How PwC can help

With only a few quarters remaining until law firms with net sales exceeding £85,000 are required to meet HMRC’s new requirements for preparing and submitting VAT returns using HMRC's online portal, time is limited for determining the best way to bring your firm’s VAT systems into compliance.

Please contact the following PwC US and PwC UK Law Firm Services professionals, or any member of your PwC service team, to discuss how PwC can help your firm be ready for this fast-approaching UK tax requirement.

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Contact us

Ryan Ebner

Tax Partner, PwC US

Karen LoDico

Tax Partner, PwC US

Gary M. Pogharian

Partner, PwC US

Carole Symonds

Partner, Law Firm Services Tax Leader, PwC US

Gregg Sincoff

Tax Managing Director, PwC US

Nancy Regan

Tax Director, PwC US

Ran Wei

Director, PwC US

Keith Lawson

Tax Director, PwC United Kingdom

Tel: +44 (0)7841 561350

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