How Can Businesses Prepare for Making Tax Digital (MTD)?

HMRC’s deadline for Making Tax Digital (MTD) for VAT may have slipped back to October 2019 for certain businesses, but its aim to be the “most digitally advanced tax administration in the world” has not changed.

Below, Finance Monthly hears from Kim Hau, Senior Proposition Manager for ONESOURCE Indirect Tax, Thomson Reuters, on preparing your business for MTD.

HMRC’s move is in-line with the global trend towards a more digital relationship between tax authorities and businesses, as well as increased regulatory guidance from the Organisation for Economic Co-operation and Development (OECD) for greater transparency in tax data.

Digital Records and Submission

The first stage of MTD for VAT mandates digital record keeping and filing for all VAT registered businesses with a turnover of £85,000 or more, providing a “soft landing” period for businesses before mandating the requirement to have digital links between their data. The ultimate aim is to improve the quality of record keeping, while reducing the mistakes often caused by manual processes and reducing the perceived tax gap – of which £12.6 billion relates to VAT.

A recent Thomson Reuters survey on MTD found that 79% of respondents keyed in submissions directly into the government gateway, something that will not be acceptable come April 2019, or, October 2019 for more complex businesses.

Instead, businesses will have to store and maintain all Accounts Payable and Accounts Receivable data in electronic form using functional compatible software. In other words, using technology that can store and maintain records, perform the required calculations, and submit the information to HMRC directly via their Application Program Interface (API). Those wedded to the use of spreadsheets will find that whilst they can continue to be used, they will require additional software to handle the digital submission piece and certain conditions must be met to ensure a digital trail.

Digital Links

The second stage mandates digital links, the requirement that any transfer or exchange of information in the VAT return process is made electronically between software programs, products or applications. This is a move to limit mistakes from manually inputting figures and comes into effect for all VAT registered businesses in April 2020.

The second stage mandates digital links, the requirement that any transfer or exchange of information in the VAT return process is made electronically between software programs, products or applications.

By far, this is anticipated to be the most complex and difficult requirement of MTD for VAT, forcing businesses to assess every single step of the UK VAT return process for each of their entities.

While there will be some flexibility in the first year of MTD going live there will be no bending of the rules. Connecting all digital records will not only help to ensure the business is compliant but will also future proof organisational systems and processes before penalties are enforced.

The Road to Digital Transformation

An obvious first step is for businesses to understand to what extent they are already compliant, focusing on where relevant data is collated, what kind of data is available via digital means and understanding the processes used for producing VAT returns.

At this stage, companies will be able to decide on what level of change is required. However, with further reforms expected after 2020 it is highly recommended that companies do not settle for a “sticking plaster” solution.

With further reforms expected after 2020 it is highly recommended that companies do not settle for a “sticking plaster” solution.

There are many solutions available to meet each gap of MTD for VAT compliance, however piecemeal solutions should be put in context of the general trend towards a digital tax agenda, and their long-term suitability.

Reviewing the options with internal and external stakeholders such as IT, software providers and external consultants will ensure that the most appropriate solution to meet operational needs is selected. This could include considering data security policies, compatibility with existing systems (e.g. ERP) and developing a tax technology strategy. After all, while MTD for VAT is a UK initiative, it is also worth considering the growing impact on tax teams of similar reporting requirements in other jurisdictions.

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