So, how can UK businesses optimise their corporate tax position following the pandemic, while adapting their organisations for post-coronavirus trading? Lucy Mangan, tax partner at accountancy firm Menzies LLP, offers Finance Monthly her thoughts.

Financing the business

The economic turmoil created by the coronavirus pandemic has pushed cashflow management up the corporate agenda. To support this, many businesses will be looking to secure additional loan funding from third party lenders or other group companies but may not be aware that increased borrowing can have a huge impact on their tax liability and therefore negatively affect their cash position.

If a company’s borrowings, either from a group company, or obtained from a third party lender due to support from its wider group (e.g. guarantees) exceed the amount that it could have borrowed from an independent lender on its own, HMRC may consider it to be thinly capitalised. In either scenario, any interest charges on the excessive amount of the loan are disallowed for corporation tax purposes. To stay on the right side of the law, organisations with high debt to equity ratios and/or low interest cover should seek expert advice around the deductibility of their interest charges.

Another important tax point for businesses to be aware of when securing additional funding is the potential for corporate interest restrictions. Where the total net interest charge of all UK companies in a group exceeds £2 million in a 12-month period, their ability to deduct interest for corporation tax purposes may be restricted. The amount of deductible interest will need to be calculated. Any restricted interest is carried forward and potentially offset in later years and it’s also worth noting that groups that do not use their full interest allowance in any period can carry forward any unused balance by filing a formal claim with HMRC. Through careful planning, companies can ensure that they structure their borrowings to maximise the tax deductibility of interest and protect any unused allowances for future use.

Any restricted interest is carried forward and potentially offset in later years.

If borrowing from overseas, companies should also be aware of the UK’s anti-hybrid rules, which can restrict interest deductions. They should also remember to consider withholding tax obligations. If loans become non-recoverable, this could also affect the tax treatment for the lender or borrower, so expert advice should be taken at the earliest possible stage.

Losses and devaluation of assets

Although this will vary between businesses, the pandemic is likely to have negatively impacted the profitability of many organisations. This situation may also be exacerbated by their assets losing value, which in turn could have a knock-on effect on their accounting profit/loss.

An important first step is for companies and groups to have a clear picture of their likely taxable profits or available losses (both for the current year and those brought forward). Tax losses may not be the same as the ‘book’ profits/losses, particularly if assets have been impaired.

Having a clear idea of their likely taxable profits or losses for the year will ensure that the company or group is in the best position to accurately calculate estimated corporation tax payments for the current period, ensure that excessive payments are not made and potentially obtain refunds from HMRC. This could be either due to overpaid tax or claims to carry back losses against prior years’ taxable profits. This approach could prove a valuable means of boosting cashflow in the months ahead.

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Changes to working arrangements – risk of tax presence

Due to travel restrictions, among other factors, many businesses are having to deal with new ways of structuring their operations and their management and employees may have worked from new locations during the pandemic.

This may include changes to the international footprint of the business. If this is the case, it’s important to keep a close track of what is happening and where, as this could result in a new taxable presence for the company in the foreign jurisdiction, potentially by way of creating a Permanent Establishment (PE). It could also create or a shift in the tax residency of the company following changes to the location of the company’s directors or management.

In respect of changes to tax residency, the OECD has advised this is unlikely to be the case if changes have only been made on a temporary basis. Groups should seek to identify where the place of management of each company is likely to reside in the future and whether this could lead to a change to its tax residence. Companies should ensure they keep a clear record of their individual circumstances in case required by a tax authority at a later date

A tax presence can give rise to a wide range of tax liabilities, including payroll, corporate taxes, VAT (or equivalent) and potentially exit charges. To determine whether this is the case, business leaders should carefully review local laws and relevant tax treaties, as well as considering any recent guidance provided by the country’s tax authority.

A tax presence can give rise to a wide range of tax liabilities, including payroll, corporate taxes, VAT (or equivalent) and potentially exit charges.

Transfer pricing

While the current focus of any business must of course be on protecting its future performance and assessing all the current risks to the business and how these can best be managed, it is also important to review how the global business strategies and operations may have changed. Transfer pricing opportunities and risks for the business should also be considered.

Groups may need to quantify and adjust transfer pricing policies for exceptional events such as redundancies, increased expenses or reduced sales as a result of COVID-19. The tax position in each country should then be considered, including the expected profit and loss profiles. Business leaders can then decide what charges are now appropriate, and any steps that can be taken to remove inefficiencies.

Currently, many businesses are still in survival mode, focused on making the changes needed to keep trading and get through the next few months. However, with a longer-term view and effective planning, they can consider the impact of a range of pandemic response strategies on their corporate tax liability, optimising their financial position.

Steve Watmore, Payroll and HR Product Manager at Sage, outlines how firms will need to prepare for the end of the government's support scheme.

The Job Retention Scheme, introduced in April, has been a lifeline for many employers and employees facing the harsh reality of lockdown halting business and operations; total figures from HMRC on claims for the furlough scheme top out at an incredible £31.7 billion as of 26 July.

However, the scheme is not an endless pot; its expiration date has been set for 31 October, and this month marks the beginning of increased costs for employers who now must cover National Insurance and pension contributions. In addition, there will be tapering on the government wage contributions for the scheme from September onwards. In this step-by-step guide we will take a look at what your business can do to effectively respond to the upcoming changes to the scheme that has helped businesses across sectors survive and revive through these difficult times.

1. Find out more about the latest changes and how they affect you

The latest HMRC release details the changes for August through to October that will affect businesses across the UK.

Employers need to plan for cost increases of around £300 per employee from 1 August onwards, since the government will no longer cover national insurance and minimum auto-enrolment pension scheme contributions. In September and October, the employer will have to increase their contributions as the government gradually removes support.

Hypothetically, with cumulative costs shown in brackets, an employer with a furloughed employee on maximum contributions of £2,500 will need to first start paying the employee National Insurance costs in August (c. £300), then account for 10% reduction on government wage contributions in September (c. £600), as well as a further 10% reduction in October (c. £900). The employer will then need to take a view after the scheme dissipates to see whether keeping employees on the payroll is sustainable.

Employers need to plan for cost increases of around £300 per employee from 1 August onwards, since the government will no longer cover national insurance and minimum auto-enrolment pension scheme contributions.

With these changes in mind, we advise that your first step should be to reassess financial and internal communication plans, using government insight as a springboard. Direction can first be taken from HMRC which will help delineate the differences between August, September and October payroll.

2. Involve your employees in plans for recovery

The ONS create a weekly report pulling out stats on Coronavirus and its social impacts. Data from 22 to 26 July shows that 54% of working adults reported they have travelled to work in the previous week. So, as businesses look to open their doors returning to some sort of “normal”, and welcome employees back to the office, this is a chance for employees to play a role in reimagining the business going forward.

In order to get employees to participate in recovery, leaders can initiate new business drives or restrategising sessions and shepherd departmental involvement. Sage has researched into the advisory value that different skills and roles can offer – the fourth annual ‘Practice of Now’ report published in 2020 found that 79% of survey respondents are confident about providing business management and advisory services like cash flow management. In addition, 75% are confident about providing industry-specific advice for clients, such as standard profit margins. 73% are confident about providing technology implementation recommendations like AI and automation. While this demonstrates accountancy can add value to services provided to clients, it also shows that it’s important to use some of that keen insight for internal processes.

Employees who have close knowledge of cash flow can help restructure businesses in the coming months and years; encouraging the involvement of employees to advisory roles outside their normal work will help businesses mould themselves to fit the changed contours of the business landscape.

3. Prepare for future uncertainty by investing in technology

Accounting software from a good partner or software supplier helps avoid costly and damaging errors. Awareness of the HMRC guides and rules will be key, coupled with salient use of technology to find the right figures from your payroll and help initiate processes like payment in lieu.

Accounting software from a good partner or software supplier helps avoid costly and damaging errors.

In order to make the right calculations and adjust payments and payroll accordingly, technology can help provide precise accounting. Payroll software can automatically adjust to the changing reclaim values, compensating for the government removing NIC contributions in August, then the reduction of the September government contribution to wages to 70% of normal gross, then finally with October government wage contributions going down to 60%.

Our third piece of advice would be to invest in the right technology for your organisation; it can help improve the efficiency and productivity – especially important in today’s society. Great tech can help to reduce errors within your business and understand your data more to enable you to respond and react better to demands.

Preparation is key and with these growing costs, businesses need to also assess whether they’ll be generating revenue to accommodate shortfall or have enough work for the employees. Payroll and accounting technology can help provide data and estimations on when companies will be back in the black.

4. Organise the HR side of the change

The key to a successful transition involves mastering the behind the scenes of payroll, knowing the letter of the law and ensuring there is a clear channel of communication between employees, managers, and the accounting department.

Employees need to be aware of the JRS claim periods, alterations to employment contracts, where they stand if they are a freelancer following the end of the scheme, how things like holiday pay is calculated and how the tapering of the scheme will affect them.

For many businesses, fixed costs have not gone away. Rent, rates utilities will all have been accrued costs through this time. For some, supply chain issues or increased costs after full lockdown can also have significant impact on operating margins. It is likely that new contingency plans around maintaining the workforce need to be considered, which unfortunately does include redundancy.

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Employees will need clear communication and guidance during this time in order to help them understand how their payroll and payslips may change, and what steps they may need to take. With the weighty impact of the furlough scheme, companies need to be more cognisant of changes to shift patterns, salaries and probation periods; business leaders need to keep a tight control on finances and internal communication now more than ever.

Last, but not certainly least, supporting your employees through these tough and uncertain times is critical. Offer guidance and care to those that have been affected negatively – establishing wellbeing and support systems that will help deal with difficult transition that are to come as the furlough scheme ends.

Looking ahead

The government introduced the Job Retention Scheme to help mitigate the negative effects of lockdown and let businesses freeze operations to play a waiting game.

Now businesses need to get back into gear and plan for the future. The four key steps we recommend taking to ensure your business remains efficient, effective and prepared for the next phase of the furlough scheme are:

• Understand how some of the latest changes to the furlough scheme will affect your business and payroll efforts – you can find out all the information you need by visiting the HMRC website;
• Involve your employees in plans for recovery – distributing a companywide note with separate plans for rallying departmental teams will be key;
• Prepare for future uncertainty by investing in technology – using accounting and payroll technology will provide great overview of financial stability;
• Organise the HR side of the change – taking care of employee wellbeing during these tough times is a must.

Simon Brown, founder and managing director of R&D tax credit specialist ForrestBrown, explains how vital funding for businesses is being overlooked – yet it could be available in just four weeks and need never be paid back.

It barely needs saying that the economy is in crisis. At the start of April, as many as one in five businesses were facing collapse within a month, while 44 per cent say they have just one to three months’ worth of money. The need to find new reserves or additional income has never been more urgent for businesses of all sizes and in all sectors.

The Government is stepping in, with £330bn backing loans from banks. But these have been slow to materialise and there have been a number of challenges along the way. Things have improved after a crackdown from the chancellor, but the loans will still need repaying at some point. Those businesses taking on debt now may be stifled by it when the recovery comes.

However, there is another way. Research and development (R&D) tax credits are a Government incentive designed to reward UK companies for investing in innovation – something we’re seeing a lot of in the battle against coronavirus.

They’re nothing new, having been launched back in 2000. On average, SMEs get about £53,714 per claim based on 2017/18 figures. However, even smaller companies can receive much bigger claims – millions of pounds in some cases. This amount of money could help enterprises remain solvent so they can live to grow.

It may sound mercenary to be looking for “free cash” at a time of crisis, but that would be a misunderstanding of how the credits work. R&D tax credits are a reward for businesses that have already invested in staff, materials and other project overheads. In fact, HMRC itself has found that for every £1 of tax foregone, up to £2.35 of additional R&D is stimulated. Perhaps every £1 invested in saving innovative businesses across the country could save £billions in lost tax revenue, unemployment payments and sluggish growth after the crisis.

Research and development (R&D) tax credits are a Government incentive designed to reward UK companies for investing in innovation – something we’re seeing a lot of in the battle against coronavirus.

One shrewd business using R&D tax credits to help plug the funding gaps and get through this challenging time is our new main contracting client MY Construction.

On 27 March, just five days before their tax year-end, we had a first call where our R&D process was outlined and engagement letter was sent. They were soon approving the submission we had prepared for the year ended 31 March 2018. The amount? Hundreds of thousands coming back into the business when they needed it most.

That’s the transformative potential of this incentive done properly. However, demand is high and the pressure facing the HMRC to process applications is extraordinary. With this in mind, it’s worth getting the claim right first time. With businesses hanging in the balance, there’s no margin for error.

Getting It Right

A claim starts with the gathering of all the appropriate information – usually data such as payroll and accounts. Next comes the identification of qualifying activities and costs,  a foot wrong at this stage can cause problems down the line. To be sure, firms really need a specialist so they neither over – nor under claim.

From these identified qualifying activities, a benefit figure can be calculated. But to be accurate, it needs to decisively navigate a host of business-specific complicating factors – like grants and subcontracting arrangements.

Overall it must have a robust methodology behind it. This should include a technical narrative, a summary of costs incurred and how the claim has been calculated. The next step is submitting the report in the way HMRC wants to see it. It’s vital to update the Corporation Tax return amended to include the R&D tax credit calculation.

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More Haste, Less Speed

Even if a business is in hibernation mode right now, it is possible to undertake a claim by collaborating with a specialist to do the legwork for them. But the biggest mistake would be to rush it. There’s been talk of businesses attempting to undertake the claim in 24 hours. This is a recipe for disaster and a sure way of inviting an enquiry into a poor claim that could cost a business dearly when they can least afford it.

However, it can be achieved quickly – if not overnight – with the right approach. Even in lockdown. Many businesses have resorted to home and remote working, and this should be harnessed to ensure the appropriate people are included in the claim process.

In summary, it’s important not to underestimate the value of R&D tax credits done properly. In challenging times, businesses need every bit of help they can get. That means not leaving a penny of the value you’ve earned unclaimed.

Here Finance Monthly hears from James Dudbridge, Associate Director at tax credit specialists ForrestBrown, who explains how to  appropriately navigate a HMRC enquiry.

Research and development (R&D) tax credits are a government incentive designed to reward UK companies for investing in innovation. They’re a valuable source of cash for businesses and support significant growth. HMRC itself found that for every £1 of tax foregone, up to £2.35 of additional R&D is stimulated. In recent years, HMRC has focused its efforts on increasing awareness of the incentives and it has seen success, with the volume of claims being made booming. Around 50,000 claims were made for the 2017-18 tax year alone – a 31% increase on the prior year.

But this success has prompted greater scrutiny of the submissions being made. Firstly, because HMRC has a duty to ensure taxpayers’ money is being used efficiently. Secondly, because HMRC recently uncovered a high-profile instance of fraudulent activity, said to be worth as much as £300m to the public purse.

This greater scrutiny takes the form of enquiries. Put simply, this is when a taxpayer gets a letter from HMRC asking for further information relating to their R&D tax credit claim. It may be worded as a “compliance check”, but in reality, it’s an investigation, and should be treated with the gravity it deserves.

While HMRC doesn’t release data about the volume of enquiries it undertakes, estimates suggest it’s about 5-10% of all claims submitted[i]. That’s potentially as many as 5,000 investigations a year. These can be prompted by any number of factors. It could be that there’s a simple, honest mistake spotted by an HMRC inspector. It could be that HMRC requires more information surrounding specific parts of the claim. Or it could relate to a wider tax position. Sometimes it can be as simple as HMRC deciding it wants to study a specific sector, or technology, in greater detail.

With more enquiries being launched than ever before, it’s important to be prepared. While the vast majority take place before any money is handed over, there are some cases where enquiries are opened after the R&D tax credit has been paid. When that happens, not only may you have to hand back cash that may already have been spent or allocated, but interest may also be charged. In all cases there is also the possibility of penalties applying if any part of the original claim is found to be incorrect.

Not only may you have to hand back cash that may already have been spent or allocated, but interest may also be charged.

But it’s not just the financial impact. If an enquiry isn’t handled effectively, an enquiry can seriously impact your relationship with the tax authority. This can make all subsequent tax issues harder to deal with. Furthermore, an enquiry can take anything from a few months up to several years to resolve. That’s time and resource being spent trying to fix the issue – with multiple people involved from around your business. It can be a massive drain. Not to mention the stress and frustration it might cause.

Avoiding an enquiry

All this begs the question: how can you avoid being the subject of these types of investigation? In some cases, you can’t. You might just be picked at random. But it is possible to reduce the likelihood, and, crucially, increase your chances of a successful resolution if it happens.

Firstly, be prepared. Just because you’ve received a benefit in the past, it doesn’t mean it will be seamless next time – even if you follow the exact same process. The same level of scrutiny should be given each and every year when making a claim – and if it transpires previous documents weren’t quite right, action needs to be taken. Simply updating documentation from your prior year isn’t enough – what HMRC expects in support of claims has changed – and so your paperwork needs to too.

Secondly, it’s vital that those preparing the paperwork are crystal clear on the criteria. Worryingly, some aren’t. Once we outline to them exactly what can go into a submission, they realise they’ve been getting it wrong. In most cases, it’s not intentional. It’s just a lack of understanding about the parameters of the relief. Claims prepared by non-experts quite often don’t properly consider the boundaries of R&D projects – something that HMRC has asked for in recent guidance.

There’s also a need to have a strong understanding of the underlying science or technology, which can be a challenge where a finance team prepares a submission. HMRC will want to see this presented in a particular way. There are then strict categories of costs involved which can be included in the claim.

Top tips for handling an enquiry

If an enquiry happens, you need to act swiftly and judiciously. Once the HMRC letter arrives, be open, be honest, be transparent and be collaborative. It’s important to begin building a positive relationship with your HMRC inspector immediately. Your first response will set the tone for the rest of the process.

At first, there may just be generic questions to answer. Don’t let this fool you. You need to think carefully about the claim you’ve submitted. Try to get ahead of any possible risk areas. Within reason, HMRC will be open to you defending parts of your claim that they may have challenged.

Don’t keep the enquiry away from people within the business. Getting the right information together for HMRC will usually involve a number of different stakeholders in the business, such as the legal team, the finance department and the technical experts. They can all help guide the process and provide insight and expertise to ensure the best possible outcome.

It’s always worth bringing in specialist external support with a strong pedigree in dealing with enquiries. They can help guide you through choppy waters and provide expert advice on all aspects of the enquiry. When engaging with an enquiry support service, the first step is full disclosure. Don’t hold anything back and give them access to your experts for interview.

The next step is to revisit all the costs that made up the R&D tax credit claim and review them again in full. Once this is completed, you will have a strategy in place designed to resolve the enquiry with the best possible outcome for your business. This will often involve formal written responses, as well as preparation of key personnel for any call or meeting required with HMRC.

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A silver lining

An enquiry can be a positive learning process. Having been the subject of an enquiry, those involved will be armed with the knowledge they need to ensure subsequent claims are robust and cover all of the areas that HMRC expect to see for that business. This is invaluable – and has a real monetary benefit. It can be the difference between a useful lump sum of capital and a failed claim with significant operational costs.

Although enquiries aren’t necessarily positive experiences, we should welcome their existence. HMRC is enforcing best-practice and it’s reassuring to know that public finances are being protected from potentially fraudulent activity.

If you haven’t made an R&D tax credit claim before and are considering it for the first time, it’s important not to be put off. That said, given HMRC’s focus on quality, it’s worth choosing an adviser with care. Look for a multidisciplinary team who hold professional credentials across accounting, tax and law. Seek evidence of supervision by the Chartered Institute of Taxation. Be assured they adhere to HMRC’s agent strategy.

This will ensure that your claim is not only fully maximised, but also protected from risk. Meaning that when you receive your benefit, you can do with it what the government intended: invest it back into your business to spark your next big push or fund the start of something remarkable.

[i] Estimate made by ForrestBrown

From the characteristics of MITC fraud arrangements to the tangible damage that such schemes can cause, below Jérôme Bryssinck, Head of Government Solutions at Quantexa, talks Finance Monthly through the options for fighting VAT carousel fraud.

Europol believes that missing trader intra-community (MITC) fraud (usually known as ‘VAT Carousel’ fraud) costs authorities around €60 billion annually. MITC is a highly sophisticated form of fraud which can be carried out due to the way that pan-European legislation means cross-border trade may be carried out VAT free. Due to the complexity of the schemes, MITC is hard to fight, and entire legal businesses frequently become unwitting participants in the carousel. Innovative technologies and new policies must be used to tackle this fraud robustly.

What is MITC fraud?

By its nature, the EU trading bloc enables the converging of regulations and standards and the removal of barriers to international export, in order to make trade within the bloc simpler and less expensive. MITC fraud works by taking advantage of the EU legislation around cross-border transactions- traders receiving services or goods from an entity in the EU do not have to pay VAT, as intra-community transactions are VAT exempt.

To create a ‘carousel’, a criminal will create or buy companies to acquire goods (let’s call them Company A in this example). These companies will next buy goods from a company in the EU (Company B). Company A will then purchase goods from Company B, with no VAT being due. Company A will then peddle these goods to a different company (Company C). This company could be a legitimate one, or a company managed and set up by the criminals. Here, VAT will be added to the sale price. Since the goods have been sold domestically, Company A must legally declare the VAT it has included on the goods, and pay this to HMRC. In the case of MITC fraud, though, Company A will vanish, and the VAT will not be paid. The goods will then be passed through many other companies which function as a buffer so as to complicate any potential investigation. Next, a company (Company D) will send these goods out of the EU and reclaim the VAT that was not in fact ever paid to HMRC. This loss of tax revenue negatively affects the provision of crucial public services for the country including education, policing and healthcare, and also increases the tax obligations of honest taxpayers.

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How MITC fraud is being fought

Because millions of euros worth of goods are traded daily, it is hard to identify illegal activity amongst so much legal activity. Combatting VAT carousels is made more difficult by the way that member states need to coordinate across separate national borders. The data needed to investigate MITC fraud criminals will commonly be stored in different forms and will be owned by disparate regulatory or government bodies across the EU. In many cases, ‘carousels’ will already have dissipated by the time authorities realise criminal activity has occurred, allowing the criminals to remain unidentified and the money to have already been lost. Those seeking to fight MITC fraud are therefore unlikely to be able to act to prevent such crimes from being carried out.

Bettering our defences

Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud. A priority is to speed up the sharing and analysing of data at a European level. Data analytics technology should be used to better comprehension of the broader context of each individual company, so that tax departments build a bigger picture of the trades that are being carried out.

Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud.

Such technology would be able to identify anomalies and red flags, such as if a company with an annual turnover of €200K was able to order €2 million’s worth of goods. Under an improved system of data gathering and sharing, VAT information would be collated and interpreted by machines, and AI would be utilised to create risk models that would help improve the accuracy of identifying anomalous results. This information could be shared with a case handler, who would be able to act more swiftly to investigate criminal activity.

As well as this, each EU Member State needs to improve their operational and analysis capabilities. The pace at which each state reacts to the flagging of anomalous results needs to improve if action will be taken effectively. At present, many member states do not have the technical means required to enable them to bring together external data. Some member states must also grow the amount of information they are gathering from traders. VAT receipts, for example, could be collated in a machine-readable format which would improve data collection.

Next steps

VAT Carousel fraud has so far proved difficult for EU Member States to combat. If we are to prevent criminals benefiting at the expense of the taxpayer, we will need a pan-European, multi-pronged approach. The amount of information gathered and collated about company and trade accounts must increase, and we also need to make use of innovative technologies which will facilitate the garnering of actionable insights from the vast amounts of data collected. Only by enacting such a systematic approach will be truly be able to tackle this crime.

Making Tax Digital (MTD) is the Government's ambitious plan to transform the way taxpayers interact with HMRC. With only a few exemptions, VAT-registered businesses trading over the VAT threshold of £85,000 are required to keep records in a digital format, ensure that the transfer or exchange of VAT information is digitally linked and submit their VAT return information to HMRC using MTD compatible software.

HMRC estimates that 1.2 million businesses are subject to the MTD rules, which became law for VAT periods starting on or after 1 April 2019 (or 1 October 2019 for organisations which are deemed to be more complex). Depending on their VAT return stagger, a significant number of these will be required to submit their first quarterly VAT return to HMRC using software by the 7 August this year.

Yet figures just released by HMRC show that the financial sector has been one of the slowest to sign up, with 75% of firms yet to register.

Commenting on the new figures, John Forth, the head of RSM's financial services indirect tax practice said: “While it's not clear why financial firms have been so slow to sign up, these figures are pretty shocking.

“It is possible that HMRC have overestimated the size of the problem due to the complexity of the VAT regime. Alternatively, they may have failed to recognise that many financial services organisations will be regarded as complex and will therefore be subject to the 1 October deadline. As a result, we may see this figure come down rapidly over the next few months.

“While HMRC have stated that they won't issue filing or record keeping penalties during the first year, financial firms should not see this as a reason not to register. MTD represents a major change to the way businesses report and pay their VAT, and businesses need to make sure they are ready.

“Currently, HMRC are dealing with 10,000 registrations every day. Clearly there are tens of thousands of VAT-registered financial businesses that need to get their skates on and register at the earliest opportunity.”

(Source: RSM)

This initiative is called Making Tax Digital (MTD) and is part of the UK’s plan for a more digital future, but not all businesses are ready. If you’re one of them, here Damon Anderson, Director of Partner at Xero explains what you can do to avoid huge fines.

1. Check your eligibility

If your business makes more than £85k each year in taxable turnover, Making Tax Digital for VAT will apply to you from April 1. After this date you won’t be able to complete a paper-based VAT return, or complete your VAT return online at the HMRC VAT portal.

If you suspect your business will soon fall within the VAT threshold, keep records digitally using HMRC-compatible software to stay within the rules.

2. Act now

If you’re eligible, first you need to find an HMRC-approved software vendor. Xero has bridging software to make it even easier to make the switch and it’s MTD tools are now live, are free for Xero users and allow you to:

• Know when VAT returns are due
• Keep a history of the VAT returns that have been filed
• Calculate how much VAT is due
• Identify the method of payment
• Post VAT returns in real time

MTD for VAT will change to the way businesses file their tax, so there’s no escape. If you’re not sure where to turn, speak to an accountant who can advise you. To help small businesses and their advisers to comply, we’ve also created Dexter the digital tax adviser who is putting a friendly face to the legislation.

Keep in mind that some VAT-registered businesses have a deferred start date of October 2019. You can find more information on eligibility here.

3. Know your penalties

HMRC can charge a maximum penalty of £500 for failure to keep the required VAT records. But don’t panic: HMRC understands Making Tax Digital is a big step, and while penalties will apply to record keeping requirements, it is expected to be sympathetic where the trader has made reasonable efforts to comply.

There’s no doubt that businesses are dealing with a lot at the moment and HMRC has said they will not pursue record-keeping penalties when businesses are doing their best to comply with the law. However, eligible businesses should still make the effort to comply by 1st April.

4. Embrace it

Millions of businesses already do so much of their business online, from banking, paying bills to interacting with their customers or suppliers, and many already using accounting software and are seeing the huge benefits. By moving to digital tax, many of the existing paper-based processes will be put to bed, allowing businesses and their agents to devote more time and attention to growing and nurturing their business.

Making Tax Digital will make tax filing simpler and more accurate. The sooner you get used to digital tax filing the more time you’ll have to grow your business.

Kim Hau, Senior Proposition Manager for ONESOURCE Indirect Tax, Thomson Reuters explains what emerging technologies actually mean and how will they help today’s organisations to interact with tax regimes around the world.

Tax regimes, legislation, and government systems are evolving. The shift towards real-time interaction will not slow down anytime soon and this is impacting the tax departments of businesses around the world. As emerging trends change, the way government systems are deployed and the technology they use will impact upon tax legislations around the world. Multinational organisations need to keep pace and embrace technology while ensuring they still comply at the speed of business.

If businesses aren’t familiar with the acronyms RPA, AI or even heard the term Blockchain then they need to learn about them, fast. They are no longer phrases from a futuristic text but actual developments in today’s technology and businesses.

1. Robotic Process Automation (RPA) is, essentially, software robots that mimic human tasks across applications in a non-invasive way. If a process can be documented for someone else to follow especially if it’s a potentially error-prone process, high-risk or manually intensive, or done so frequently that it’s just not a good use of time, then it’s a good fit for RPA. Companies will find that some of their tax processes will fit this bill and free up resource to work on more important tasks.

2. Machine Learning and Artificial Intelligence (ML/AI) are two concepts often related and used interchangeably. Machine learning generally describes algorithms used by machines to teach themselves. Artificial Intelligence is used more broadly to describe the ways in which machines can perform tasks intelligently. Simply put it’s about taking a big population of data, learning patterns about that data, and then revising and training algorithms automatically to get better over time. Machine learning doesn’t have to be as sophisticated as self-driving cars. Think about how Amazon, Google, and Facebook use machine learning algorithms to improve recommendations, suggestions, and news feeds. Some of those capabilities are being applied to finance and tax today, particularly in areas where accurately categorising, grouping, or classifying large volumes of data frequently is part of the process. Ingesting data from a dozen different ERP systems and getting it lined up for tax compliance and reporting is an obvious place where it can make a difference to business.

3. Blockchain has been integrating into the business world far sooner than many predicted and as such there is a growing belief that it will radically change the way in which value is exchanged and how items are tracked and traded. Banking, insurance, voting, land registries, real estate, and stock trading are all examples of areas and industries where Blockchain is likely to impact.

While much of the publicity around Bitcoin is related to hackers and the cryptocurrency bubble, much of the real Blockchain activity seen so far is centered on the distributed ledger itself and the ways in which it’s going to disrupt middle men, or intermediaries, by connecting the transacting parties directly. From a positive point of view it is believed that Blockchain will speed up transactions and reduce cost while reducing fraud and increasing transparency.

At its core, Blockchain’s a distributed ledger that records transactions — and many of those transactions will be taxable events which is why it matters to tax. The details around Blockchain are complicated but suffice to say there’s a reason so many governments and industries are actively experimenting with Blockchain projects.

From a tax point of view, it’s likely that Blockchain will impact the tax department via governments and tax authorities pursuing digital strategies around e-government and that technology used by tax to stay compliant will have to adapt to this evolution.

With these developments in mind multinational companies should focus on incorporating technology trends that will assist in managing tax requirements rather than just putting out fires when the next major tax initiative comes along.

HMRC’s Making Tax Digital (MTD) is the perfect opportunity for businesses to be proactive and developing processes that are nimble enough to adjust to change. Tax should focus on what it can control, like the preparedness of systems and the scalability of processes, in order to adapt to the next change. Today, keeping pace with specific rate changes and regulatory modifications is largely a function of tax technology platforms. With HMRC’s October deadline there’s never been a more obvious time to implement solutions that enable and empower tax departments.

For many, it can seem like a daunting task, so is there anything you can do to make the process easier? Here James Foster, Commercial Manager at specialist accountancy provider Nixon Williams, provides some top tips on completing the process.

The majority of the working population have their tax deducted at source from the company that they work for, however, anyone that is self-employed has to complete a self-assessment tax return in order to be taxed appropriately on their earnings by Her Majesty’s Revenue and Customs (HMRC).

When you start working for yourself, your workload includes everything that you might need to do to make your business a success – from marketing and advertising to admin and ordering stationery. You may find that managing your finances is more complex than you might have expected as you will need to keep records of all the money you spend in the running of your business, as well as how much you earn. Many people decide to use the services of a professional accountancy firm like ours to help them through the process, but some decide to manage everything themselves. Either way, there are some simple things you can do to make the process as straightforward as possible, so here are my top five tips:

• Get organised – compiling all your invoices and receipts ahead of time is the best way to alleviate last minute stress when it comes to self-assessment forms. Ideally, you’ll have kept some form of spreadsheet or an online portal up to date throughout the year of your accounts, and you can use that to finalise your tax return. But if that’s not the case, don’t wait until the very end of January to get started. There are often missing pieces of information you’ll need to track down, so give yourself plenty of time to work through everything. And don’t forget – if it’s your first time completing your Self-Assessment Tax Return, make sure you’re registered with HMRC in time.
• Know the key dates for completion – If you decide to complete your tax return online then the deadline for this is any point up until the 31^st January, whereas a paper tax return needs to arrive with HMRC by the 31^st October the previous year. If you haven’t sent an online tax return before then you will need to register and HMRC advises you to do this no less than 20 working days before the deadline.
• Separate your work and personal bank account – a number of self-employed people operate with just one bank account for personal and business use, but this can make it hard to separate out your business expenses from your personal expenses. It’s often easier to identify which costs are related to your business by having a separate business bank account. This will not only help you keep a track of your business expenditure throughout the year, but it will make your life a lot easier when it comes to your tax return.
• Know the expenses and tax reliefs that you can claim – if you are a sole trader, for example, make sure that you know the expenses that you can claim in your tax return, as there may be some items you might forget about such as business mileage and expenses relating to working from home. It’s also beneficial to know about other tax reliefs that you are entitled to such as personal pension and gift aid payments.
• Tax returns can be complex so use an accountant – having professional support can be really beneficial because an accountant should not only assist with the compliance side of things (i.e. helping you to file your tax return on time) but they will also give you pro-active advice where appropriate. Tax returns are something most accountancy practices deal with on a daily basis from April to January, alleviating a lot of the financial stress away from clients and helping them to focus on what they do best – making a success of their business.

Running your own business and managing the many tasks that come with it can often push your tax return submission to the bottom of your ever-growing pile of work to do – but help is always available from professionals with the right experience and knowledge of the latest legislation.

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.

There’s nothing like waking early on Christmas morning and rushing downstairs to open your online tax return...

It may not be your idea of a fun Christmas tradition, but if you use the extra time off over the festive period to get your tax return sorted, you can see in the New Year with a clear conscience and a paid bill – instead of the guilt pangs and nagging worry that hit the 5 million people who are still likely to be putting it off.

You don’t have to devote Christmas Day to it; there are endless less exciting days over the festive period, when a tax return may actually help break the monotony. You have to ask yourself whether you usually have a particularly memorable 28^th December – and whether you’ll really be missing out if you spend a few hours with your tax return instead.

5 tricks to make your tax return simpler

1. Check you can get into the system in advance

Before you do anything else, sign into the Government Gateway. If you’re doing it online for the first time, you’ll need to sign up, and wait up to seven days for your code to arrive. If you’ve used the system before, sign in now and check you haven’t forgotten your log in details.

2. Spend some time on your preparations first

If you’re not great at filing, don’t try to do everything at once: day one should be about tracking down paperwork, and ordering copies of anything you can’t find.

This includes certificates for savings accounts or dividends, pension statements, proof of any employment income and a P11d. If you work for yourself, you’ll want bank statement, sales invoices, receipts for expenses and paying-in books. If you received income from letting property, you need letting agreements, and bills for expenses and management fees.

3. Make sure you’re claiming for everything you can

Check that you’re claiming for all the reliefs and exemptions available to you. This includes pension tax relief and gift aid for higher rate taxpayers. Government figures show that only 22% of higher rate taxpayers claim the additional relief on gift aid they’re entitled to – but it can really add up.

If it seems like a lot of bother to claim for something, check if there’s a simpler option. If, for example, you are self-employed and work from home, you can do the calculations and count some of your household bills as expenses. Alternatively you can just use the flat rate of £10 a month for 25-50 hours a month, £18 for 51-100 hours, and £26 for 101 hours or more.

4. If in doubt, get help

There’s loads of great information on the HMRC website, which has really improved in recent years. You can find the answer to almost any question that’s likely to crop up. There are also plenty of guides and videos offering tips to save you time and money.

If you can’t find what you’re looking for, then other than on Christmas Day, Boxing Day and New Year’s Day, you can phone the self-assessment helpline. Unfortunately, the closer you get to the 31 January deadline, the busier the helplines get, so you could spend some time on hold. However, if you stick with it, you can get the guidance you need.

5. If you’re going to need an accountant, get a move on

If you already know that nothing will persuade you to touch your tax return over Christmas, be honest with yourself about whether you’re going to need an accountant to sort it for you, and contact them before the break. Don’t leave it until January, when accountants are snowed under, and many won’t have the time to take new clients on. Professional help will typically cost between £100 and £300, so you’ll need to decide if it’s worth the expense.

Recently released HMRC data* shows that the money being invested in Innovative Finance ISAs (IFISAs) has increased by over 700% in the last year with six times more people now saving into an IFISA.

The amount of money now in IFISAs has risen from £36million in 2016-17 to over £290million in 2017-18. The data also shows that over 25,000 people opened IFISAs in the last 12 months. Just 5,000 accounts were open in 2016-17 and this rose to 31,000 in 2017-18. One of the reasons for this sharp rise may be due to the low return’s savers are getting from other types of accounts such as Cash ISAs and every day savings accounts.

Commenting on the data, Paul Sonabend Commercial Director of Relendex, a Peer-to-Peer lending exchange dedicated entirely to financing UK property, said: “IFISAs are giving savers the chance to earn high returns on their money. The interest rates offered on these products outstrip the rates offered by high-street lenders on traditional Cash ISAs which can be as low as 0.2%. With inflation running at 3.4%**, traditional savings accounts which are not matching the rate of inflation are losing money in real terms.

“IFISAs now offer savers sensible alternatives paying more than a cash ISAs, without the level of risks and volatility of Equity ISA’s. These returns are not magical, they are produced by taking the banks out of the picture and giving the lion’s share of the interest paid by borrowers directly to savers. For example, the Relendex Secured Portfolio ISA offers rates of up to 6% ensuring that savers are seeing real benefits from their hard-earned savings.”

The UK Government introduced the IFISA on 6th April 2016. The IFISA allows individuals to use some (or all) of their annual ISA investment allowance to lend funds through the growing Peer-to-Peer lending market, whilst receiving the tax-free benefits of ISAs.