By Russell Gammon, Chief Solutions Officer at Tax Systems
Initially introduced by HMRC in 2019, Making Tax Digital (MTD) is an initiative that aims to make it easier for individuals and businesses to pay the correct amount of tax and keep on top of their affairs. The first phase of MTD is Making Tax Digital for VAT, which requires businesses to keep records digitally and file their VAT Returns using the capable software.
What you’ve missed
MTD for VAT started on 1st April 2019, when VAT-registered businesses with a taxable turnover above £85,000 had to comply. Fast forward three years later and from 1st April 2022, all VAT-registered businesses have been required to follow MTD for VAT rules too, regardless of size. This invited an extra 1.1 million businesses to the party, including smaller VAT-registered businesses – such as landlords and the self-employed – and global companies with UK subsidiaries.
For these businesses, the way they submit their VAT returns has changed as HMRC turns to digitised software. No longer will they be able to key figures into HMRC’s portal but must instead submit values to HMRC via their API.
Right here and now
Digitisation has brought benefits to many industries and the tax sector is no exception. Weeks on from the deadline, businesses should now be reaping the benefits of MTD, aside from simply being compliant with the new requirements.
First of all, purpose-built VAT calculation technology ensures that you pay the correct amount of tax. Whilst being MTD compliant is the baseline required, it does not necessarily ensure that your return is correct; by implementing dedicated VAT software, you remove the opportunity to make certain mistakes when preparing and submitting tax returns. Purpose-built VAT compliance software also increases efficiency. From our research, organisations file their VAT return an average of 3-5 days earlier than before and compliance workloads are reduced by up to 70%. The subsequent elimination of spreadsheet errors, flagging of anomalies and faster process, not only reduces the risk of compliance audits and potential penalties for an inaccurate tax return, but frees up more time to derive business insights from the data.
This business intelligence can inform tax planning by identifying critical gaps and assessing business strategies. Access to such huge amounts of data can also be valuable outside of the tax department as these findings can be shared with other teams to help improve policies. For example, accurate and consistent VAT data can provide insight into profit margins in different areas of a business and help regulate strategies should they be found to be too conservative or aggressive.
Finally, with more time and business insights in their hands, tax professionals have more opportunities to exploit. For example, repayment opportunities can be identified through better treatments, and complex processes like partial exemption are easier to manage.
Coming up next
MTD for VAT is the “first out of the gate” in HMRC’s desire to become an advanced digital agency. MTD for Income Tax is currently ramping up and Corporation Tax is next on the agenda.
Currently, corporation tax filings are submitted 12 months after year-end with only estimates given – for businesses over a certain size – prior to that deadline. For those under that size threshold, a business’ profit from Q1 of 2022 will not be formally declared until Q4 of 2023 – 21 months later. As a result, HMRC is arguably “in the dark” about what receipts they can expect and the impacts of schemes, such as furlough or the CBILS scheme, until a long time after their implementation.
In November 2020, HMRC released a consultation on Making Tax Digital for Corporation Tax to address these shortfalls by getting more timely information from businesses. Its implementation, scheduled for April 2026, will require businesses to make quarterly submissions of key data points.
In addition to having to provide more data, MTD for CT will potentially require much closer collaboration between VAT and CT processes, and data being shared between the processes will become the norm, rather than the exception. Therefore, choosing the right software for MTD for VAT should be seen as a stepping stone to a broader solution that can, in time, work for all taxes. Making strategic choices now around VAT will continue to pay off as the government’s ambitions for MTD continue to grow.
At the same time, outside of HMRC, there could be the introduction of EU-wide regulations, which require additional standards, even for non-EU countries such as the UK. Again, having the right software in place that can be updated to take these additional requirements into account will mitigate future headaches.
