The introduction of Making Tax Digital (MTD) is probably the biggest operational change to be introduced in the UK’s tax system in the last few decades. MTD will provide businesses with a modern, streamlined system to keep tax records and relay detailed tax information to HM Revenue & Customs (HMRC).
This idea is not new. The global direction of travel is towards ‘real time’ tax reporting for businesses, and it’s a matter of time before HMRC follows.
What are the immediate requirements?
As a starting point along the MTD road, from 1 April 2019, businesses with a turnover above the VAT registration threshold (currently set at £85,000) will need to keep specified digital VAT records (including a digital VAT account). They will also need to submit their VAT returns to HMRC digitally via an Application Program Interface (API) connection, a computer programme that stores information in one application or website to be shared with others. The VAT account must also be API enabled as HMRC may request to review the VAT account. Alternatively, businesses may choose to submit the VAT account on a voluntary basis (for example, to reduce their risk rating).
Businesses that exceed or expect to exceed the VAT registration threshold will need to consider:
Whether they may be exempt from the requirement to file returns electronically under MTD (charities, local authorities, government departments and overseas businesses will not be exempt from MTD for VAT – unless their taxable activities are below the VAT threshold) what records will need to be kept digitally what the digital VAT account should look like how to submit their digital VAT return in line with MTD requirements whether to submit their digital VAT account to HMRC penalties for late filing and payment of VAT, and for not keeping digital records or having digital links.
What can you do now to get ready for MTD?
With less than two months left until MTD for VAT, many are still uncertain about the requirements and how specifically these requirements will apply to their businesses.
Businesses should think about what the ‘digital’ VAT account should look like. It is important to ensure that all VAT adjustments that are included in VAT returns are correct and that the existing reporting systems extract all the necessary source data. This would be a very worthwhile exercise to undertake, particularly for complex businesses that are required to make many VAT adjustments (such as partial exemption calculations, capital goods scheme adjustments, specific blocks on Input VAT recovery etc.)
Businesses should also consider testing the source data. Undertaking a data analytics exercise can give some comfort that existing VAT processes and controls are working well and highlight any potential issues.
Our recommended 5 steps
IT and system changes may take 9 to 12 months to review and implement. HMRC advise that failure to meet the necessary MTD requirements could result in penalties although there will be a 12 month grace period (‘soft landing’) after MTD goes live to enable business to ensure that they have the necessary processes in place and digital links. It is therefore important that all affected businesses start reviewing their systems, processes and VAT adjustments now.
To ensure that your business is ready for MTD, we would recommend the following 5 steps:
1. Take a deep dive into your VAT adjustments – consider whether they are correct, and how they flow through to your VAT account.
2. Review your internal reporting systems, processes and controls. Liaise with your software providers and internal IT teams to get a view on what they can do to help to get ready for MTD.
3. Consider likely costs and potential disruptions to your business. Agree additional budgets for changing and maintaining your systems, seeking specialist advice.
4. Test the integrity of your data and consider whether your VAT-related data is accurate, current and complete, whether there have been any recent data reviews, and whether your current VAT codes are appropriate.
5. Consider what information you wish to submit to HMRC and how API connection will work. Do you need to develop or acquire additional software? Is it easier to outsource the submission of VAT returns to a third party?
Embracing the opportunity
MTD is about more than just software – it is the first step in a long journey towards fully digital, real-time reporting, and will bring the UK in line with the direction of travel globally.
Businesses that embrace and implement MTD across their tax processes will benefit from better quality reporting, fewer errors and faster results – freeing up time to focus on the strategic issues that really matter.