The advent of HMRC’s Making Tax Digital (MTD) initiative has changed the way in which we process and arrange our tax affairs irrevocably. Whilst previously only businesses with a taxable turnover above £85,000 had to comply, since April of this year, all VAT-registered businesses have been subject to mandatory online MTD submissions. Soon, similar regulations will apply to Corporation Tax (CT). But what does this mean for how we submit our returns and are most companies ready?
Traditionally, VAT and CT, with their widely varied deadlines, have not been connected for reporting purposes. However, this is set to change when MTD for CT arrives, as the new quarterly CT submissions will have to be sent to HMRC within days of their equivalent VAT filings. This means that it makes sense for organisations to align their VAT and CT processes more closely.
The reality remains, though, that currently most companies are simply not prepared to leverage data across multiple MTD streams. Today’s typical accounting landscape has siloes with specialists dedicated to one specific area – be it VAT or CT – with separate data and separate timescales. Unsurprisingly, this means that tax advisors can be skilled in either CT or VAT but rarely in both. As processes continue to align, this presents a challenge.
Also notable is the fact that CT filing happens twelve months after the end of the CT financial year whereas VAT fillings happen quarterly or monthly, with reporting occurring 30 working days after. Such distinct deadlines don’t have data overlap because CT uses data that has long since been checked and finalised, while VAT-related data can be subject to change during the reporting cycle. Currently, this is no major problem but the arrival of MTD for CT with its new reporting cycles will disrupt the landscape.
Changing reporting cycles
When MTD for CT arrives, there will be additional data to submit on a quarterly basis, bringing VAT and CT tax data closer than ever – with greater interaction between the two. If your company follows calendar quarter, it currently files its VAT returns on May 5th. Going forward, you will also be submitting CT returns on 30th April, making the time between submissions much shorter. Naturally, this means that data must be aligned across both processes and that the CT team will need visibility of the VAT team’s reporting and vice versa.
So how do we connect these disparate teams more closely? Firstly, we need to revamp the legacy, siloed approach to CT and VAT and instead introduce fully integrated tax teams. This will encourage a holistic, transparent view of both disciplines underpinned by a single source of truth, enabling clarity and seamless processes throughout the tax department.
Secondly, we can look to technology to provide new ways of doing business. Too many companies still depend on Excel and similar software to enable their MTD calculations even though this puts severe constraints on processes. This old-fashioned approach needs continual manual updates, with great potential for human error, risks regulatory compliance and lacks smooth integration with other financial systems. With HMRC recently issuing updated guidance on penalties relating to MTD for VAT non-compliance, the incentive to not make mistakes continues to grow.
New opportunities and added value
The time is right, therefore, for companies to evaluate the new generation of UK-specific VAT and CT applications. These are less time-consuming, integrate seamlessly with other core IT platforms such as ERP, and automatically update according to the latest regulations. Specialist software also has the potential to minimise risk, improve precision and increase control while boosting efficiency. This can help companies of all sizes to eliminate common problems, such as laborious data formatting.
Modern, best-of-breed financial systems and VAT calculation tools can also generate value beyond meeting MTD compliance requirements. They provide more precise, timely and transparent data, which enables smarter decision-making and improved business intelligence.
This consistent access to large volumes of accurate data provides clearer insight into the profit margins in different areas of your business, helping companies identify disparities. This data can also be extracted beyond the tax department to the broader business where additional value can be leveraged.
At the same time, they enable more complex calculations, such as partial exemption, helping companies potentially recover more in VAT, for example. Not only does this ensure faster results, but it also takes the monotonous number crunching out of the hands of skilled professionals who can be redeployed to more high-value tasks.
Introducing the cloud
The traditional approach to on-premise computer platforms was to get tied into lengthy, expensive partnerships with big legacy vendors, requiring significant upfront investment in both hardware and software as well as costly ongoing maintenance. This might well provide access to an extensive solutions portfolio but is not always the best tool for the job at hand.
Today, companies are increasingly turning to the cloud instead, where best-of-breed solutions can be built from an ecosystem of existing components, connected via APIs. This means you can build the specific solution you need in less time and with fewer upfront costs, paying only for what you need when you need it.
A vision for the future
By integrating tax departments across VAT and CT and migrating to new, flexible, constantly updating cloud technologies, companies can futureproof themselves for whatever comes next on the MTD journey. Furthermore, outside of HMRC regulations, many anticipate that wider EU standards will be introduced to address similar issues. With the right solution already in place, companies will be able to comply quickly and with minimal effort.
MTD for CT is set to be introduced in 2026, which may seem like the distant future, however re-evaluating your tax reporting processes, integrating data across tax teams and implementing versatile solutions today will ensure you are well ahead of the competition. Starting to make the necessary changes now means that your team will be fully integrated and efficient – having already ironed out any preliminary issues – ahead of the compliance deadline. Using all the available data in the most connected, transparent and accessible way, will ensure VAT and CT are synchronised for success.
For more information visit https://www.taxsystems.com/.