Casper Winkelman, Solution Principal, Sovos
The digital transformation of tax is both a global and unstoppable trend, with continuous compliance advances around the world the order of every passing day. In the UK, the frenzy around Making Tax Digital (MTD) has been pervasive for some time now. Originally announced in 2017, the initial deadline for the MTD mandate finally came into effect on 1st April of this year.
In the UK, the MTD journey has only just begun, with further work ahead to ensure that organisations are compliant. At its core, MTD aims to modernise the previously manual VAT return process for UK companies, with (amongst others) data sent via API into an HMRC portal, where it will be stored securely. Government-approved software enables this modernisation.
VAT-registered businesses with an annual turnover above £85,000 have been affected by the 1st April deadline. However, it’s important to note that this preliminary date is by no means the endgame for MTD. Rather, it’s a continually evolving process for everyone’s benefit. Further checkpoints — for example, the October deadline for ‘complex and specialist’ businesses — reflect the idea that this is just the beginning of MTD, a stepping stone to the next level.
To understand what MTD is laying the foundation for, it’s worth comparing developments overseas. After all, when looking at the bigger picture, it’s clear that MTD is not bringing anything particularly revolutionary to the table. Most recently, it was announced that the Indian government is forming a committee to explore how to introduce clearance e-invoicing or real-time reporting. As a manufacturing powerhouse, India is the latest country to join the global trend that originated in Latin America of digitally transforming tax.
In fact, Europe’s digital tax interest was piqued by the work of Latin American (LATAM) countries in relation to VAT reclamation. Back in 2003, these countries began the process of a more digitised and proactive reclamation, seeking to close the VAT gaps they were facing. Brazil, for example, established mandatory electronic invoicing and real-time reporting, meaning invoices had to be uploaded to a government platform and be approved. As a result, the health and cash reserves of the LATAM tax authorities enjoyed a monumental boost.
While it’s still early days and India’s committee is only now starting to examine other clearance countries, everything could move quickly in the wake of this — so UK companies need to prepare for these changes, should they wish to continue trading with India and other countries as part of a global supply chain. This is because the potential for e-invoicing compliance in India and around the world can impact multinational companies that have a manufacturing presence in these countries.
Closer to home different versions of this movement can already be seen in Spain and Hungary, as just two examples. In 2017, Spain brought in real-time VAT reporting; 2018 saw Hungary introduce real-time transactional reporting. As of January this year, Italy joined the digital tax movement by bringing in compulsory electronic invoicing for domestic business-to-business transactions, moving away from the previous business-to-government portal. Now, the likes of Greece, France, and Russia are pursuing innovation in stages — alongside many more tax authorities across the globe.
All of this is worth bearing in mind when considering the initial reaction to MTD in the UK, which was decidedly mixed at the time and hasn’t subsided since the system came into effect. For many, the system is a costly annoyance. Particularly within the SME community, some businesses have lamented that it disrupts a method of working that had not previously seemed problematic. Others have spoken about the hindering expense of new software.
Nonetheless, when examining the full story behind MTD, it’s apparent there should be a reframing of the topic and how the initiative is perceived by organisations signing up to it. Let’s not forget, MTD is about much more than merely the digitising of tax returns; instead, MTD will be the foundation for an evolution in UK taxation, future-proofing British businesses.
Bringing home the benefits
Framing MTD in this way fosters a fresh outlook on initial concerns about upgrading to new tax methods. First of all, implementing MTD brings several new and crucial advantages to taxation. Replacing manual processes with software greatly improves accuracy, minimising the chance of data going missing — HMRC will be able to spot any abnormalities much quicker than before. MTD also enables visibility into the state of tax throughout the year, which means that companies can see their tax status. The result is much more informed decisions regarding growth, courtesy of accelerated business processes.
Businesses that view MTD as one step on a journey towards a more efficient way of engaging with HMRC will find their finance teams bestowed with greater intelligence — useful, considering that HMRC can analyse a business any time for tax status. Although it’s understandable that many people (especially in smaller businesses) might feel alarmed by this change, those who invest time in selecting the right software for the job — while also engaging with expert providers to help them complete the transition — will reap the most rewards.
However, those who forget that the MTD journey is no longer voluntary do so at their peril: MTD is underway and HMRC has further plans to remodel the way in which businesses submit their tax returns. Company leaders can decide whether they want to crawl down this path or carve out a bold and proactive approach.
Next time the topic of MTD comes up in a meeting or as part of planning, finance leaders should ask themselves: ‘What can MTD do for me?’ — rather than worrying about what they need to do to comply with the system. Looking at how tax authorities are operating in geographies all over the globe, it’s clear that MTD is just the first mile of the marathon.