Those caught under MTD for VAT phase 1 have now completed their reporting and the digital submission of their return and over 4 million submissions have been received by HMRC. Approximately 1.4 million businesses have signed up for the service and an additional 265,000 businesses who come under the threshold have voluntarily joined to benefit from digitalisation. Over 30,000 advisers had created new Agent Service Accounts. HMRC reports that more than £38.5 billion payments have been made and over £13 billion repayments issued through the service.
So, before the second mandation comes into force in April 2021, it seems an optimum time to reflect on the trials and tribulations of phase 1 and perhaps consider what we’ve learnt along the way.
While MTD adoption has been high, the rollout was not a particularly smooth one. Issues identified by the ICAEW include:
|VAT helpline swamped, , forcing many to put pen|
to paper to resolve their queries e.g. for digital exclusion exemptions
|Some unable to check if their ASA was linked to their government gateway ID|
and had no way of checking if their clients were registered for MTD
|Direct debit mandates were often not transferred so that|
businesses risked missing their deadlines
|Needed to add new clients over the old system first|
|Return periods were recorded incorrectly and some overseas|
businesses had difficulty signing up at all
|No ability to access ‘old’ VAT registration certificates.|
Perhaps in anticipation of these issues, HMRC had adopted a light touch approach to penalties. This meant that those who did not complete their return digitally were not fined, according to Theresa Middleton, Inspector of Taxes for HMRC; a stance that will of course change when the soft landing period comes to an end and we move into the second mandation period.
The lessons learnt
Yet the move to MTD has also proven a valuable learning curve. Numerous surveys were conducted over the past year that revealed both how resource intensive and error prone the VAT process had become and the potential for digitalisation to improve the lives of tax and finance teams. Some of the most interesting insights were:
- Time – Tax and finance teams were spending more time on their VAT returns pre-MTD than they had realised. Surveys showed 56% of tax professionals were spending 10 days plus on returns, with many finance teams dedicating four months a year to VAT reporting, whilst others reported 75% of compliance effort was spent on data collection.
- Complexity – Digitalisation was more complex than had been envisaged. 65% were concerned about managing manual adjustments including for complex calculations such as partial exemption, special schemes, amendments and error corrections.
- Future compliance – Many were already looking beyond MTD for VAT to future compliance requirements. Our own survey showed 38% were considering MTD for corporation tax when deciding on MTD software choices and 72% had plans to automate their tax functions by 2024.
- Digital opportunity – Other finance and tax professionals saw MTD and digitalisation as an opportunity. 68% hoped that technology would automate key processes, freeing up their finance teams and allowing businesses to make better use of skilled in-house resources while 65% planned to use technology to reduce compliance workloads. Almost half (48%) believed MTD would improve accuracy and reduce errors.
The repercussions for phase 2
Phase 2 will see the culmination of MTD for VAT and the creation of an end-to-end digital tax process in the UK for the very first time. It’s also likely to be more demanding, requiring businesses to digitally link from source data all the way through to submission.
Some businesses will be tempted to take the path of least resistance and use spreadsheets to comply, performing adjustments and amendments outside of the loop. But this could see reporting exposed to a higher risk of error because spreadsheets are susceptible to broken macros or formulas, are difficult to manage, and troublesome to audit.
In contrast, those that don’t do the bare minimum to comply but actively embrace automation of the process stand not only to benefit from reduced risk of error and of audit but also from efficiency gains.
Streamlining tax processes can, for instance, help free up resource. In its evaluation of MTD for VAT published on 19 March 2020, HMRC found that those who “fully integrate their accounting and tax software report spending less time on their tax”. Accuracy was also improved as these businesses “now only enter information once, making it easier to spot and correct mistakes at source” and MTD was found to significantly reduce “arithmetical and transposition errors”.
The report concludes that “for many businesses, it is most effective to keep their digital records and submit their returns through a single, fully integrated software package” suggesting that compliance software produced the most successful outcome. It also recognised that MTD was often “the catalyst for a business to consider its wider approach to technology and how it can harness it to drive profits and growth” and so had a transformative effect, with the potential to make tax become less retrospective and more forward looking.
Businesses that adopt dedicated compliance software will therefore be ideally placed to meet the challenges of phase 2 but also those on the horizon. HMRC makes no secret of its plans to extend MTD for VAT to income tax and corporation tax. Those that have adopted compliance software and futureproofed their processes are likely to find transitioning to these new digital regimes far easier and less disruptive.