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We are aware that there are upcoming reforms in the way that charities pay their VAT bills, but don’t know what we have to do. Can you help Aunt Tiffany?
Technology is supposed to make our lives easier but, as we all know, it also has the potential to throw a spanner in the works. Such is the case with the government’s Making Tax Digital (MTD) initiative which goes into effect this year. Despite having many merits it’s also creating significant issues for many, including VAT-registered charities.
The ambitions around MTD are to transform tax administration making it more effective and efficient in all areas, including VAT. From 1 April, VAT-registered charities which operate over the current VAT threshold of £85,000 will be required to use the MTD service to submit their returns using approved accountancy software and keep digital records for every transaction.
Some third sector and also public sector bodies have been given an extra six months to comply with the new regime although this only covers those charities that are not incorporated.
Many charities are registered for VAT and, in general terms, most are able to access very limited specific reliefs. While many of the larger third sector organisations have already invested to ensure they are compliant, there are still many charities which find themselves with a limited window to get their houses in order before this new form of digital reporting comes into effect. The clock is ticking but there are some simple steps that they can take to get on the road to being fully compliant.
My initial advice is for such charities to ensure they maintain all their financial records in a digital format going forward. As of 1 April all charities with taxable turnover (income where either 0%, 5% or 20% VAT is charged) exceeding the £85,000 VAT threshold will have to submit their VAT returns via approved accountancy software. It’s important to recognise that all types of accounting software will not be compliant for MTD. While HMRC is continually approving new software that can be used, charities will need to ensure their chosen package is on the list or they might find themselves unable to submit their data.
Any charities using older desktop versions of software or programmes like Excel to manage their accounting records must therefore take urgent advice on how this can be converted over to an HMRC accepted format.
Those charitable organisations which carry out partly exempt activities or non-business activities and do not recover all their input VAT also need to get advice on how the accounting packages will accommodate these adjustments.
The introduction of MTD provides an ideal opportunity for a charity to review the suitability of its existing accounting software package. Given the growing number of options in the marketplace, it may be worth considering an upgrade that will deliver additional benefits and efficiencies.
Ultimately the progression of MTD should make life easier for individual taxpayers, companies and charities but with April 2019 quickly approaching, it will prove an initial challenge. I would urge any VAT-registered charities which are not yet compliant to begin the process immediately to avoid the impact of the oncoming changes.
This month’s problem page was written by Euan Morrison with support from Iain Masterton.
Euan Morrison is head of charities at Chiene & Tait; Iain Masterton is head of VAT at the accountancy firm.
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