Making tax digital: The final countdown

As part of a wider governmental drive, HM Revenue & Customs  (HMRC) is gradually taking more of its relationship with UK taxpayers online.

From April 2019, its flagship Making Tax Digital (MTD) initiative comes into effect, and will initially impact UK VAT-registered businesses over the £85,000 threshold. While MTD doesn’t change the VAT schemes that businesses are on, it does have a significant impact on how records are kept, how data used for transactions is handled, and how the process of filing with HMRC is managed.

For those businesses that are using spreadsheets, desktop software or bespoke systems, it is unlikely that these will be compliant unless additional software or upgrades are purchased and installed.

It has taken a while for HMRC to communicate out to all those affected, with the first formal communications via social media in late October, followed by letters a month later, leaving the possibility that many small businesses could be unaware or unprepared.

So if you are not sure if you are compliant, or ready for the new digital tax world, what do you need to do?

Bookkeeping technology the key

At the very heart of your financial management, and of MTD for VAT is bookkeeping. Believing that the tax gap can be partly explained not just by fraud, but also through human error, HMRC is attempting to minimise, if not eliminate as much manual processing as possible. Ensuring everyone is keeping their records digitally, and not even copying and pasting data between systems is a key part of this.

It is possible to check if your bookkeeping system is MTD ready – or not.

Cloud systems

Over the last 10 years, cloud-based technology, where programs and data are stored online, has led the way in creating connected systems. VAT is already largely a digital tax with mandatory filing through the government gateway, so bookkeeping systems which are also online have the advantage of being designed with the capability of connecting with other online systems in mind.

“If you are using one of the major cloud players like Xero, QuickBooks Online, or Sage Business Accounting Cloud, then you can be fairly confident that the system you are using is ready to go”, says Andrew Perrett, cloud accounting manager of taylorcocks Chartered Accountants.

Desktop applications

However, no desktop solution is MTD compliant unless it has received a specific upgrade.

“There are not only many providers out there, but also lots of versions. Understanding which one you are on will help identify if it’s a simple upgrade you need, or if you will have to purchase

a whole new version”, continues Perrett, adding “some older versions are simply not supported, and you need to know if this will impact you or not”.

Spreadsheets

In a late concession, HMRC accepted that spreadsheets are an acceptable form of digital record keeping but in order to be compliant they must use ‘bridging software’ to complete the filing process. These solutions are primarily being marketed to accountants in practice in order to help them service as many clients as possible; and while there are some solutions available directly to businesses, their reliability and pedigree are yet to be proved.

There is a longer-term issue with spreadsheets that Matt Flanagan of IT systems specialist BlueHub is quick to point out: “As more taxes become digital in the future, no one can be exactly sure for how long they will be acceptable. I would use this as an opportunity to consider a cloud-based option. It can often prove to be cheaper, allow you to spread the cost with a subscription, and you benefit automatically from upgrades in the future.”

Regardless of what your current approach is, unless you have an appropriate subscription or support package it seems inevitable that there will be a cost implication.

Reviewing your financial process

The term ‘digital link’ is an important one in the world of digital tax, and as we move forward will become increasingly so. Digital links are a way of automatically passing data, such as totals for the VAT return, without rekeying or even copying and pasting.

As an example, if you have data that needs to be collated from several different sources in order to complete your return, or you perform a calculation in Excel for partial exemptions, these need

to be handled carefully through digital links.

“While there is a soft-landing period for business that rely on data from multiple sources to create the required digital links, there is no soft landing for filing. It is essential that you view your whole process of how your bookkeeping data is handled from filing all the way back to the source data. In years to come VAT inspections will include looking at this whole process”, says Perrett.

Thinking beyond April 2019

It is worth considering that MTD for VAT is actually only the first wave of change, with plans for both income and corporation tax, as well as any necessary changes caused by Brexit.

For Adam Prince, VP product management, compliance and migration at Sage, reviewing your technology options now provides a considerable opportunity to minimise disruption later.

“Aim to have a fit-for-purpose solution beyond MTD for VAT, and in particular one which is in the cloud so that implementing regulatory and process change later just happens for you,”  says Prince.

“The message here is to not think about accommodating for individual changes, but plan for broader change. This will also allow you to focus on business wealth generation and customers, rather than constantly trying to stay  on top of software updates.”

THREE TOP TIPS

Our experts’ top three ‘MTD prep’ recommendations:

1 Talk to your current software provider – contact them to find out if your current system is MTD Ready, and if not what your options are and the costs.

2 Work with your accountant to find a solution – this will allow you to look at things more holistically, and ensure you are complying to the full extent of the regulations, as well being able to provide suitable software.

3  Move away from spreadsheets at the earliest opportunity, leaving plenty of time to research, implement, and test bridging software if a stop gap is needed.

KEY MTD REQUIREMENTS

✔ Keep records digitally

✔ Use ‘digital links’ to connect data sources

✔ File your return directly from your software

Which means you won’t  be able to:

✘ Type returns data directly into the government gateway  

✘ Manually type or copy data from one system to another

✘ Use spreadsheets, without ‘bridging software’

✘ Use manual records for bookkeeping

THE IFA’S VIEW ON MTD

MTD represents probably one of the most significant changes to the UK tax system in living memory. The scope of the proposed changes are far-reaching and will affect all IFA members, their clients and the wider community.

We are supportive of technology; however, there has to be a business benefit to its implementation which goes beyond tax compliance.

MTD for VAT should only be launched once robust testing has been undertaken and concerns from the pilot resolved. As a member organisation representing the views of accountants working in small practices and SMEs we have fed back your concerns to HMRC in our representations: ifa.org.uk/representations

These concerns have included the rapid pace of change, lack of awareness and understanding of MTD, as well as mixed views on opportunities and threats, and are consistent with HMRC’s recent research on agents’ views towards MTD: gov.uk/government/publications/agents-views-towards-making-tax-digital-for-business-and-the-single-financial-account

From a practical perspective, we urge you and your clients to engage in the pilot: gov.uk/guidance/use-software-to-submit-your-vat-returns We will continue to support you through our representational work and by providing relevant member benefits: ifa.org.uk/benefits