Making Tax Digital (MTD) is a UK government initiative that aims to transform the way tax is administered by requiring businesses to maintain digital records and submit their tax returns electronically. It was introduced to improve the efficiency and accuracy of tax administration and to make it easier for businesses to manage their tax obligations.
MTD for VAT was introduced on 1st April, 2019. Initially, businesses above the VAT registration threshold of £85,000 were mandated to keep digital records and submit VAT returns using compatible software. However, due to the COVID-19 pandemic, the initiative and implementation was adjusted, starting with a ‘soft landing period’ from 1st April, 2019, to 31st March, 2021. During this ‘soft landing period’, businesses were only required to fulfill the ‘bridging software’ obligations but not required to have ‘digital links’ in place between software systems.
These ‘digital links’ were required by HMRC from 1st April, 2021, aiming to ensure a fully digital and streamlined process from source records to VAT returns submission.
Positive Impacts of Making Tax Digital for VAT
MTD for VAT has had some significant impact, many of which have helped businesses improve accuracy, compliance and reduce manual processes.
- Businesses are required to use compatible accounting software to keep digital records of their revenue and outgoing costs in order to comply with MTD for VAT. This transition from paper-based to digital record-keeping systems has streamlined record-keeping procedures, decreased paperwork, and improved accuracy.
- Businesses must report quarterly with summary updates of their income and expenses related to VAT, to HMRC. Businesses have had to adopt digital systems that can produce and submit these VAT reports accurately, and on time as a result.
- MTD for VAT has encouraged businesses to embrace automation in their accounting processes. By using compatible accounting software, businesses can automate various tasks, such as data entry, calculations, and report generation. This automation has led to time saving, reduced errors, and improved efficiency.
- The digital aspect of MTD has assisted in enhancing VAT reporting's accuracy. Calculations that are automated and records that are kept digitally lower the possibility of human error and result in more accurate submissions. Additionally, businesses are better able to understand their financial situation and make more educated decisions due to the consolidated insights that digital record keeping can enable.
- By making tax digital, it has compelled businesses to connect their accounting programmes to other platforms, including banking platforms, invoicing tools, and inventory management systems. This interface allows for easy data transfer, prevents duplicate data entry, and gives businesses a comprehensive picture of their financial data.
- The real-time information sharing and digital reporting allows HMRC to have a current and accurate understanding of the tax processes of businesses. Improved compliance and tax reporting interventions are the results of this.
As the objective of MTD is to streamline tax compliance and improve communication between businesses and HMRC, businesses have encountered various challenges during the transition. Some of which are detailed below;
Challenges of Making Tax Digital
Despite these positive impacts, MTD for VAT has brought about some challenges for businesses and tax professionals. Among the list of challenges is technological transition, compliance monitoring, data integration, and software updates and maintenance.
Making tax digital for VAT requires businesses to adopt compatible accounting software to maintain digital records and submit VAT returns. This transition to new software systems caused challenges from software selection, implementation, to training and support. With this shift to digital record-keeping, tax professionals are obligated to closely monitor compliant transactions, verify the accuracy of the reports and ensure that all the necessary information is included.
Data integration and accuracy also play a significant role in complying with Making Tax Digital as businesses face the challenge of integrating new systems. Businesses must ensure seamless data transfer and accuracy across these systems.
The introduction of this new initiative has meant that tax professionals and businesses need to stay up-to-date with software updates and maintenance requirements. This includes keeping the software and related systems updated with the latest versions, and ensuring compliance with HMRC’s regulations. Tax professionals such as the Head of Tax or Tax Technologists have had to surmount these challenges by adopting compatible tax technology for data integration, accuracy and compliance, to stay compliant with MTD.
MTD for VAT Implementation
Below is a comprehensive guide on implementing and ensuring compliance with MTD for VAT regulations, while also maintaining an efficient process.
- Step 1: Assuming businesses are familiar with MTD for VAT regulation and requirements set by HMRC, they must first evaluate their existing systems and processes for record-keeping and VAT compliance. To ensure compatibility requirements, it is important to identify any gaps or areas that require improvement and assess the compatibility of the current systems.
- Step 2: If current systems are not compatible with MTD for VAT regulations, choosing a new accounting software or redefining internal processes may be required. When choosing a new software some considerations are needed including functionality, ease of use, integration capabilities, and support services. The chosen software must be capable of maintaining digital records, generating VAT reports and submitting returns directly to HMRC via their API.
- Step 3: On implementation of the new systems and/or processes, comes implementation of new software. Businesses must enter relevant information, tax codes, and opening balances. Configuring the software to generate VAT reports and ensuring data synchronisation with other internal business systems.
- Step 4: As part of the implementation step, businesses must enter their current or legacys paper-based records to the new software. Data integrity and accuracy during the transfer process should be considered and maintained.
- Step 5: Learning and implementing efficient digital record-keeping processes, and how to maintain and update their digital records using the new systems and software. These record-keeping processes should emphasise the importance of accuracy, completeness, and maintain an audit trail for transactions.
- Step 6: The next step requires businesses to configure the accounting software to generate VAT reports in the required format for HMRC APIs. Ensuring the reports are capturing all necessary information, including sales and purchases where VAT is applicable. This step is a chance for tax professionals to test VAT reporting functionality, and ensure accurate calculations and data submissions.
- Step 7: After testing, businesses should submit VAT returns to HMRC using compatible software for making tax digital. Ensuring they understand the submission process and deadlines, businesses should submit VAT returns and verify they have been successfully received by HMRC.
- Step 8: Regularly monitoring the compliance, reviewing the accuracy and completeness of digital records, quarterly reports and VAT returns is a continuous process. Any challenges that arise should be addressed, and a level of compliance should be maintained. Staying informed of any updates regarding regulation changes to MTD regulations, is highly recommended for tax departments.
Tax professionals can effectively implement and comply with these requirements and regulations if the right steps are taken. MTD for VAT simplifies record-keeping with digital systems, streamline the tax process, reduces the risk of errors, and enhances transparency allowing for easier monitoring and verification of VAT compliance.
How Making Tax Digital Empowers Business
This UK government initiative requiring businesses to maintain digital records and submit tax returns electronically directly to HMRC, improves efficiency and VAT accuracy. Despite the challenges of new implementations and complying with MTD for VAT, from the technological transition, to compliance monitoring with the benefits for businesses means greater transparency in tax reporting and efficiency through tax automation.
This is inclusive of streamlining the tax process, reducing errors, and improving financial decision-making. MTD for VAT empowers businesses to embrace digital transformation, save time, and gain greater control over their tax obligations. Furthermore, this digital shift equips businesses with the tools and capabilities to navigate the evolving indirect tax landscape effectively and efficiently.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.