Making Tax Digital: the impact for financial services firms

Making Tax Digital (MTD) applies to all VAT-registered businesses with taxable supplies above the £85,000 threshold. (Or does it?)

Things aren’t quite so straightforward for financial services organisations since their supplies of services are generally exempt from VAT. However, where such entities make certain exempt supplies to clients belonging outside the EU, they may have the right to register for VAT voluntarily and recover any associated VAT incurred on their expenditure under the ‘specified supplies’ rule. Many financial services organisations are therefore registered for VAT even though they aren’t making any 'taxable' supplies.

Why is this important? Because compliance with the Making Tax Digital requirements is not mandatory for organisations voluntarily registered for VAT under the specified supplies rule. Instead they have the option to comply on a voluntary basis if they wish.
 
The new MTD regulations are relatively onerous and strict, so opting for voluntary compliance at the start date of 1 April 2019 seems unnecessary. However, the new digital record-keeping and filing regime is likely to become compulsory for all organisations in due course. Furthermore, HMRC plans to bring other taxes, such as corporation tax, under MTD. Therefore, taking steps to comply with MTD during the first year HMRC is applying a 'soft landing' could well be beneficial by enabling organisations to take their time to meet the requirements, with the comfort of knowing that any compliance weaknesses may not be penalised.

However, as an additional complication organisations that only make specified supplies may well be importing services (e.g. marketing, IT or consultancy services) from suppliers outside the UK. These purchases will normally be subject to reverse charge VAT (self accounting regime). Where such purchases exceed £85,000 in any 12 month period, this would count towards the taxable threshold mentioned above meaning the recipient organisation will fall back into the net for mandatory compliance with MTD regulations. 

It’s therefore important to keep track of the value of purchases made from overseas companies. This is recommended not only for compliance with MTD, but also for general VAT accounting purposes.

Delayed timeline for large and complex businesses
In an announcement that will most likely come as welcome news for many in the financial services sector, HMRC has given firms that operate under a VAT group an extra six months to comply with the Making Tax Digital (MTD) requirements. They now have until October 2019 to comply and will be able to join the pilot scheme from Spring 2019.

How we can help
If you’d like a free Risk and Opportunities meeting to discuss the impact of Making Tax Digital on your business,  please contact your existing Moore Stephens contact or get in touch.
 

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