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This article was first published in the November/December 2018 UK edition of Accounting and Business magazine.

UK businesses could potentially be staring at a VAT double whammy next March. Not only will they need to be prepared for a no-deal Brexit, which looks increasingly likely as the days tick by, but they will also need to be ready for Making Tax Digital (MTD) for VAT.

On 1 April 2019, three days after the UK is set to leave the EU, MTD for VAT will come into force for all those business with an annual taxable turnover above the VAT registration threshold. This will be no April Fool’s joke, as every business affected must have software that can transfer VAT data directly to and from HMRC’s systems. Despite the 12-month ‘soft landing’ period, many businesses, especially those that continue to use spreadsheets for their VAT records and those with complex VAT structures, could be in for a shock.

The Brexit date adds an additional layer of complexity – in amongst the rubble of a no-deal Brexit scenario, businesses will need to know how to account for their VAT. The government is aware of this and as part of its no-deal briefings has produced an outline of what would happen after 29 March.

But experts are sceptical. ACCA’s head of tax, Chas Roy-Chowdhury, says: ‘While the government’s aim is to keep VAT procedures as close as possible to what they are now, there’s a strong possibility that things will change and that more guidance is to come – for example, with the land border between Ireland and Northern Ireland. This is still hazy, and we look forward to the government’s “more information in due course”.’

The government’s VAT guidance explains that if a no-deal happens, the remaining EU member states will become third countries. This means businesses’ IT systems will need to be changed in order to recategorise them. The government will provide additional guidance in due course around the exact accounting rules.

‘It’s important for businesses to note that they are currently able to obtain VAT refunds from other member states through a straightforward single-market mechanism,’ Roy-Chowdhury says. ‘This will stop and some member states may stop refunding VAT at all to the UK as they currently do to the US.’

So VAT payers will need to prepare for this possibility while at the same time preparing to move to an all-digital VAT environment. The worry is that not only will businesses be unprepared, but that HMRC may not be ready either.

‘Businesses are at different stages of preparation for the change: some are well engaged in the process but others seem not yet to have grasped that fundamental change is on its way,’ says RSM tax consultant Andrew Hubbard. ‘Of course there is another side to this: how well prepared is HMRC for MTD? There are positive messages coming out of HMRC on all of this and there is a pilot programme underway, which we hope will iron out some of the rough edges, but like any other major change we will only be able to assess the effectiveness once it begins in earnest.’

While he doesn’t expect the system to fall over on day one, Hubbard is not expecting everything to go smoothly. This is compounded by the fact that new software products are only now coming on to the market, leaving little time for businesses to integrate them into their existing systems, assuming they have any systems in the first place.

But either way, a no-deal scenario will not be welcomed by the millions of UK businesses that could potentially be affected by this double whammy.

Philip Smith, journalist