Making Tax Digital (MTD) for VAT: What does it mean for you?

The HMRC’s Making Tax Digital (MTD) mandate was designed to simplify and expedite tax reporting, with advantages, according to their gov.uk website that include:

• Making it easier for individuals and businesses to get their taxes right
• Allowing businesses to integrate tax management with a range of business processes through software
• Contributing to wider productivity gains for businesses by encouraging digitalisation
• Improving accuracy of digital records
• Enabling digital records to be sent directly to HMRC

Regarding companies whose products are subject to value added tax (VAT), all VAT-registered businesses should now be signed up for Making Tax Digital. As a result, these businesses must now use compatible software to keep their VAT records and file their VAT returns.

For many smaller, VAT-registered businesses, investing in new software was not on their IT roadmap for the immediate future and so many settled instead for a bridging software to connect non-compatible software (ex.: spreadsheets) to HMRC systems. This, however, was never going to be more than a temporary solution, as both government and private enterprises look to harness the efficiencies of digital record keeping and reporting. In the long term, a comprehensive tax platform is the solution to meet the ever evolving domestic and global VAT reporting requirements.

But first, let’s explore the changes implemented by the Making Tax Digital initiative:

Making Tax Digital for VAT — a primer 

Since the end of the last decade, HMRC’s Making Tax Digital has introduced a variety of new rules for how most corporations prepare and submit their VAT returns. MTD for VAT focuses on three key requirements:

1.Digital record keeping

• All accounts payable and accounts receivable data must be stored in electronic form, ideally using technology that can store records, perform the required calculations, and submit the information to HMRC directly via their API, without manual intervention.

• Although spreadsheets can be used, additional software (bridging software) will be required to handle filing, and there will be certain conditions attached to this approach.

2. Digital links

• There must be a direct digital link between the software and HMRC. This means that spreadsheets are acceptable, but only if they can be digitally linked through to another programme (i.e. a bridge software) that can make the final digital submission.

• Any movement of data between one programme and another should not require any rekeying or manual intervention.

• Importing data via CSV or through automatic links in a spreadsheet will be allowed.

3. Digital submissions

• Manual input of figures via the current government gateway will no longer be accepted. All submissions must be made using appropriate software with a digital link.

Transferring data manually within or between different sets of software that the business uses for MTD compliance will not be acceptable. This includes copying and pasting – HMRC emphasises this point in its definitions. (Comprehensive information regarding MTD is available from the Making Tax Digital gov.uk website at: https://www.gov.uk/government/publications/making-tax-digital

How does this impact your legacy systems?

These changes, while designed to make reporting and compliance automated and simple, do not come without inevitable growing pains. Many businesses, used to doing things a certain way over years or decades and without the capital to invest in new software, may not yet be ready to make a large capital investment in a MTD-compliant tax solution and therefore settled on a band-aid approach.

While this enabled small businesses to meet the requirements of MTD, they perpetuated the inefficiencies the program was meant to address. If you are such a business, it is worth considering transitioning to a comprehensive platform that can set you up for VAT reporting success now and in the future, especially given the unpredictability of tax regulations across the EU and beyond.

What is the best software solution for you? 

Given the range of options available for complying with MTD requirements, choosing the right one for your business can be difficult. A solution such as Thomson Reuters ONESOURCE Indirect Tax Compliance can meet reporting and regulation needs, while also preparing them for unforeseen regulatory changes ahead. A few key features you will want to look for when considering a solution to address your VAT needs:

• Digital readiness: Does it provide tools to easily upload & adjust source data, calculate your return & electronically submit to HMRC, supported by a full audit trail and comprehensive reporting?
• Greater control and insight: Does it provide risk management controls across all functions, enabling review and sign off of processes?
• Compliance confidence: Does it monitor changes to tax rules and legislation and provide cloud-based functionality to ensure your systems are up-to-date?
• Simplified data and processes: Does it integrate data from multiple sources and organise it in a common, structured method with a consistent and repeatable process?
• Ability to grow and evolve: Can it support your process transformation and company growth at scale?

Summary 

Wherever your business is, in the transition to digital, aligning with the requirements of HRMC’s MTD mandate is not only important — it’s the law. Choosing the right solution for your needs not only helps you make sure you comply; it also sets you up for future success, navigating the often Byzantine and everchanging landscape of value-added tax law.