CTG representatives met HMRC officials earlier this year to discuss the implications of Making Tax Digital (MTD) for VAT for charities. The main outcome of the meeting was to clarify what manual adjustments will be allowed under MTD. Since the meeting, full guidance has been published and can be read here.

Information transfer between interfaces must be digital where the records are part of the MTD journey. Adjustments can be calculated separately outside the digital records of the organisation and transferred in digitally or manually – i.e. this step is not part of the MTD journey.

The following is a list of items that CTG believes can be treated as ‘adjustments’ and thus subject to manual adjustment. HMRC’s response to these points is highlighted in bold below and we anticipate clarification in the updated VAT Notice and/or supporting guidance to clarify this:

Accruals

• VAT due on a cash receipt received before the end of a VAT return period where a sales invoice has not been raised in that period e.g. this might happen with a royalty receipt
• Other transaction relating to the return period but details not received before the accounting records have been closed
• Annual purchase invoices (ones with monthly entries giving the twelve tax points)

HMRC response: A correction of the digital record is not required as they are entered correctly in the digital record. The changes to the two VAT returns are adjustments so can be done manually.

Incorrect entries

• Corrections of errors within the period which have been noticed at review stage. For example, correcting an inputting error where a delivery charge has been entered as the VAT due on the transaction.

HMRC response: The correction should be made to the underlying data. However, if the period has been closed the return can be corrected by an adjustment.

Values not known at the time of input into software

• All partial exemption and business/non-business calculations or aspects thereof.  This would include either an adjustment made on a total basis and/or transaction by transaction basis, for example, correcting for input VAT claimed as fully recoverable when it should have only been recovered at the partial exemption rate (where the accounting system already allows for partial exemption in its recovery of VAT).
• Capital Goods Scheme adjustments
• Apportionments of input tax that are not strictly related to partial exemption, such as the 50% rule on car leases and the 70% rule on certain pensions costs
• Deemed supplies arising from change of use of zero rated building
• Deemed self-supplies such as ‘self-supply of construction services’
• Calculations relating to multiple supply apportionments (such as membership subscription apportionment)
• Revaluation of inter-entity charges such as where HMRC has issued an open market value notice on inter-entity supplies

HMRC response: These are all adjustments and can be entered manually. HMRC is aware that the guidance as currently written suggests that the individual records will need to be corrected as well. HMRC will update the Notice as this would be an unduly burdensome and would risk creating errors rather than reducing them.

In kind transactions/barters

HMRC response: This is not an adjustment, the value ascribed to these transactions will need to be entered into the system as any other transaction would be. However, if assigning a value to such transactions causes them to be entered after the accounting records have been closed or adjusted after a value has been input then this would cause the transaction to be treated as above.  

Pragmatic solution for digital conversion when, for practical reasons, prime records for outputs and inputs are outside the digital process

For example charity fundraising events, petty cash etc

HMRC response: A pragmatic solution can be found, but HMRC will need to decide the process for this. We will be updating the notice to relax the requirements for someone who has supplies made by a third party. We are aware that this won’t cover the situation you are talking about here, but we don’t expect to see this outside of charities. If we were to include it in the VAT notice as a provision with the force of law it would need to be very tightly worded to prevent its being used by other business to side-step their digital record-keeping obligations. This would not be in anyone’s interest.  We therefore propose to publish separate guidance for charities that will cover this situation. Before publishing any guidance on this we will ask for your input. The draft of the VAT notice that we will be sending for comment will include some placeholder text to that effect.

Reverse charge service accounting

The adjustment might be done after the invoice has been loaded into the system because invoice processing staff are not VAT experts and will not know what rate needs to be applied. These adjustments are made during the VAT return process carried out by the tax department during the pre-submission review.

HMRC response: We cannot see how you could deal with reverse charge without looking at the individual invoices. If we have understood this correctly, the issue here is around the timing of the adjustment. The invoices are still looked at individually, but the corrections are dealt with after the period has closed. This essentially would be the same as Incorrect entries. At the time they are input the rate for the reverse charge has not been correctly entered. There is existing guidance on corrections of errors within the period which have been noticed at review stage, for example correcting an inputting error where a delivery charge has been entered as the VAT due on the transaction. The HMRC view is that the correction should be made to the underlying data. However, if the period has been closed the return can be corrected by an adjustment.

CTG response: We are not comfortable with this suggested approach as it would require charities to know they are non-compliant and to hope to ‘get away with it’.  We will be seeking further clarity from HMRC on this point.