Making Tax Digital (MTD) makes it mandatory for businesses to keep digital accounting records and complete their VAT submissions to HMRC via an Application Programme Interface (API), utilising MTD compliant software. This is what to expect from postponed MTD. HMRC will expect full compliance from businesses by keeping digital accounting records by April 2021. This is what to expect from postponed MTD.
Full compliance is what to expect from postponed MTD
The roll out of MTD Phase 2 has been postponed until April 2021 to allow businesses the breathing space to concentrate their limited resources and cash flow on surviving the COVID-19 crisis. We still expect to be told when the new MTD Phase 2 timeline will be finalised. HMRC will expect full compliance from businesses, to reaccrue tax revenue which was decimated during the pandemic, by the time that the soft landing period elapses.
There are still a number of misunderstandings arising from certain areas within VAT Notice 700/22 that seem to contradict one another. Here we investigate those to help you understand what to expect from HMRC MTD Phase 2. To read the government’s guidance click here.
We expect businesses to focus on digitally linking the raw data so their Enterprise Resource Planning (ERP) can generate reports without the expectation of manual entry and that any third-party data that is pre prepared. Simply put, MTD replaces submissions to HMRC with an API utilising MTD compliant software. Phase 2 reveals that the high quality data sources is what to expect from postponed MTD.
Digital business records
Under MTD for VAT some of your ‘business records’ will have to be digital but not all. Original invoices should be retained if that data is typed into the MTD software but if it is scanned the original invoice can be destroyed. Records that must be kept digitally make up your “electronic account” and include designatory data, supplies made and received, supplier statements (in some instances), petty cash transactions, reverse charge transactions, summary data, and adjustments. You do not have to digitally link everything and can make manual changes outside the process as long as you link back in. The disadvantage of doing so is that this increases the opportunity for error and makes auditing more complex. HMRC states that “using a digital link for these processes, rather than a manual transfer, reduces the chance of errors.” HMRC recognises there are points when “calculations will have to be made outside of any software you use to keep the digital records, or there may be a need to enter data into your software from particular sources” although in the case of a dedicated compliance solution, changes can be made within the software.
A single system containing your digital business records is not what to expect from postponed MTD. HMRC states the records do “not all have to be held in one place or in one program”. They don’t even need to be in the same format but can be in “a range of compatible digital formats”. However, expect the tax authority to conduct analysis of your spreadsheets or MTD software as part of the audit process to determine if digital linking has been observed.
During the soft landing period HMRC accepted copy or cut and paste so you may well have done this over the past year and still been compliant. But that will not be the case after the soft landing period ends. We can expect HMRC to come down hard on those that don’t comply with the digital links mandate. The argument will be that businesses have been given plenty of time to plan and execute the digital links deployments and should be aware of the filing deadline post April 2021. We shouldn’t expect any leniency that business may have ‘enjoyed’ during the outbreak to continue post Covid-19.
To achieve the expected full compliance, it’s important that you keep your digital accounts using HMRC-recognised software. Prestige favours utilising Quickbooks Online. This means our accounting is fast and accurate. You can also ask for a quick update report on your accounts at any time. The automated software will quickly spot common errors, duplicates or anomalies in your VAT. So you can be more confident when you submit your VAT to HMRC through QuickBooks.
It’s the most reliable system for keeping accounts up to date. You can upload receipts as they are generated, you can automate invoicing and this world leading platform connects with your bank which means your bank statements can be linked to reduce unnecessary data entry. Furthermore, the Intuit Payment Network, partnering with GoCardless, means your customers can pay invoices directly. Then the software automatically updates and reports your real time cash flow status.
Most digitally advanced tax authorities globally
The introduction of a new points-based penalty regime for VAT, scheduled for 2020, will enable HMRC to automatically award points and financial penalties. It signifies the tax authority’s intentions to ensure penalties are awarded fairly and proportionately but also more frequently and effectively through the use of automated systems.
When it comes to adjustments to your digital business records, “only the total for each type of adjustment” are required to be kept in the MTD software “not the details of the calculations underlying them” so calculations do not need to be recorded. You also do not need to amend the digital record of a supply where the input tax claimed or output tax due on a supply has been changed as the result of an adjustment or error.
Updating systems is not always an easy task. But one of the objectives of MTD is achieving tax efficiency and streamlining systems. The government has consistently focused on its efforts to make HMRC one of the most digitally advanced tax authorities globally. Technically you can become compliant using an API-enabled spreadsheet, but this will expose the business to the errors synonymous with this form of record keeping and therefore poses a higher risk of investigation and penalties from HMRC.
HMRC will expect you to make every effort to comply. Provided you can demonstrate you are attempting to comply and give a good reason for your inability to do so, you can apply for an exemption. Exemptions will be considered on the basis of you having complex or legacy IT systems that will take time to adjust or if you have acquired another business, for instance. However, even if HMRC awards you a “specific direction” i.e. an alternative deadline, you will still need to actively demonstrate you intend to comply while awaiting their decision and during the extended period.
Few of the examples given on the HMRC website will resonate with businesses. The company structure combined with a variety of accountancy systems mean that many will have a unique architecture that will need to be adapted for digital linking. So, the focus has to be on how to simplify this process.
Together, these implications mean that businesses need to use the time made available to them through the extension of the digital links mandate. That means focusing on rolling out an MTD strategy that provides businesses with the capability to demonstrate compliance. It’s crucial for the business to be able to trace amendments and adjustments in order to pinpoint where and how calculations were made. To generate that level of detail, the business needs to be able to create a digital audit trail that tracks back through the process all the way to the source data itself.
Your accounting records will need to be maintained on a suitable software that allows you to make live submissions with HMRC, bridging software which has previously been acceptable during the soft-landing period may not be accepted after the soft landing period elapses. Not only is this what to expect from postponed MTD Phase 2, this is one more armament in how her majesty’s government will manage the £300bn deficit. To read more about that click here.
Digital links will be required between the computer systems you use as part of your business processes. All systems will need to be integrated such that data can be transferred from one system to another automatically with no human interference.
You will need to record the date and value of sales and purchases, and the rate of VAT charged. A key difference here is that whilst many businesses have previously entered daily or monthly totals into the accounting system or recorded transactions from statements, most businesses will now need to supply the information for each individual supply, however existing exemptions for retail businesses will continue.
We expect that these changes may be amended or further delayed to a time when businesses will be in a position to respond appropriately.
Although MTD Phase 2 has been delayed, many of the areas it focuses on have greater benefits than just achieving ‘compliance with MTD requirements’. Businesses can also benefit from the increased efficiency that the automation of integrated systems and digital links provide. With movements in accounting technologies and significant advancements in cloud-based accounting systems, it is always worth thinking about how these could help make your business more efficient. If you’re not currently using a cloud accounting system, don’t think you are using your current system to its full capability, or if you quite simply don’t know where to start, we would always be happy to chat through the options available.
At Prestige Business Management we can help your Business
At Prestige Business Management we can help your business understand the best solutions for the long-term success of your business. We take partnering with the right software and services very seriously. So we can offer you a complete and fast paced package of technologies, accounting and great communication that will be right for your business in the modern, economic marketplace. Talk to us to get unique offers and savings that we can access for you as official partners with these great platforms. Whatever advice or support you need Prestige Business Management can help. Call us today on 0203 773 2927 today.