Making Tax Digital: the impact for financial services firms

Making Tax Digital 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. Financial services’ supplies are generally exempt for VAT. However, where such entities make certain exempt supplies to clients outside the EU, they have the right to recover any associated VAT on their expenditure. This is 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 registered for VAT under the specified supplies rule. Instead they have the option to comply on a voluntary basis if they wish.
The new Making Tax Digital 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, with other taxes such as corporation tax brought into its net. Therefore, taking steps to comply with Making Tax Digital in the period when HMRC is still applying a soft landing could well be beneficial – enabling organisations to take their time to meet the requirements, with the comfort of knowing that any compliance weaknesses shouldn’t incur any penalties.

However, as an additional complication organisations that only make exempt supplies may well be purchasing a range of services (e.g. marketing, IT or consultancy services) from suppliers outside the UK. These supplies will be subject to reverse charge VAT self accounting. Where those supplies exceed £85,000 in any 12 month period, the recipient organisation will fall back into the net for mandatory compliance with Making Tax Digital. 

It’s therefore important to keep track of the value of supplies received from overseas companies. This is recommended not only for compliance with Making Tax Digital, but also for general VAT accounting purposes. Given that financial services organisations can rarely recover all their VAT, there may be ways to mitigate some VAT leakage and improve levels of partial exemption VAT recovery.

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.
Join us at our upcoming MTD event in London on 12 November to understand how MTD will affect your organisation and what you need to be doing now to prepare.

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