HMRC announced on 30 March that the digital links mandate, originally set to come into force in April this year, has been delayed for all eligible businesses until 1 April 2021. The decision was not unexpected due to the difficulty of implementing the mandate during the COVID-19 outbreak. Many organisations are struggling to remain operational and HMRC has over 60,000 staff working remotely from home, making it challenging to oversee the implementation and enforcement of the mandate.
The delay will effectively see the compliance deadline extended by twelve months for the majority of businesses, and by six months for those large businesses caught under the original deferral period. In practice it is simply an extension of the soft-landing period for all businesses until 1 April 2021. Just how this will impact businesses will depend on the frequency of their reporting, be it monthly or quarterly, and their stagger period, as shown below:
|Filing Frequency||Quarterly Stagger||First Period Mandated for Digital Links||Filing Deadline|
|Monthly||N/A||1 April - 30 April 2021||31 May/7 June 2021|
|Quarterly||Stagger 1||1 April - 30 June 2021||31 Jul/7 Aug 2021|
|Quarterly||Stagger 2||1 May - 31 July 2021||31 Aug/7 Sept 2021|
|Quarterly||Stagger 4||1 June - 31 August 2021||30 Sept/7 Oct 2021|
The message from HMRC has been that organisations should make the most of this opportunity. They have told us that customers should use the time “to ensure their administration and processes are ready for their business ramping up again and future requirements” and that this includes “ensuring that there are digital links in place between their software components.” This means that, while the tax authority acknowledges the disruption caused by COVID-19, MTD should not be shelved. Rather, businesses should continue to prepare for Phase 2 because it will help tax functions operate more efficiently and minimise errors, as shown in its recent MTD for VAT: Evaluating Making Tax Digital’s impact on record-keeping behaviour and scope for error among small businesses report.
In our view, the delay is to be welcomed as it will give businesses that are already struggling to deal with diminishing revenues, absent staff, and little prospect of a return to normality for months to come, a much needed reprieve. Taking the pressure off will allow tax and finance teams to focus on priorities such as the wellbeing of staff and management of the company cash flow. But the delay also has the potential to improve the 2020 implementation of MTD in multiple ways, resulting in a more considered deployment that provides more value.
Take a pause
The delay will hopefully buy time for many businesses that were looking at MTD compliance only, enabling them to take a breath and review how they approach Phase 2 of MTD. This will allow them to extract more value from the time and effort invested, so that they can address the broader challenges associated with tax automation. The good news is that organisations are already recognising that they can use MTD to “drive profits and growth” (according to HMRC’s Making Tax Digital: An evaluation of the VAT service and update on the Income Tax service report) while our own research reveals that the software choices around MTD can help resolve a range of issues, such as process efficiency, data management, error mitigation and risk reduction.
The same research reveals that 69% of businesses have been implementing MTD to achieve basic compliance i.e. are meeting the minimum requirements and have not used MTD as a catalyst to achieve wider improvements to their processes. This is at odds with their priorities and aspirations. The majority will readily admit that they believe automation of tax processes will improve data quality, increase accuracy, bring efficiency gains and reduce the risk of queries from HMRC. So, why are they stalling? Perhaps because they simply haven’t had the bandwidth and time to secure the budget for the very sort of investment in MTD needed to bring about this transformation.
Also, MTD is regarded by many as disruptive. Over 70% of businesses are still using spreadsheet-based processes for MTD despite the fact that 80% of this audience don’t trust their accuracy. Finance and tax teams are reluctant to dispense with spreadsheets altogether, but the reality is they don’t have to. It’s possible to use MTD compliance platforms to augment and de-risk spreadsheet compliance processes. MTD software can add incremental value around areas such as checking the accuracy of tax data to ensure correct submission, tracing and justifying adjustments and, crucially, can create an end to end digital audit trail to prove compliance.
Time for us to improve
The deferral to April 2021 will also provide the software industry with the time needed to build new valuable capabilities into their platforms. Key requirements that the industry will have to provide in our view include the ability to automate special tax methods such as PESM, validated data cleansing through advanced data handling features, fully automated digital audit trails and time-stamped evidence of adjustments and calculations.
We can also expect to see the thorny issue of data quality be better addressed. MTD is not just about creating digital records but about making sure source data is accurate and accessible – and this is still an area the industry is working on. As of today, errors tend to be detected by comparing the return being generated with returns from previous reporting periods. This offers limited insight. By using tax logic instead, it becomes possible to assess the values in the return with those expected using a range of parameters and the system can then automatically flag any anomalies. We also expect tax to become more autonomous, with help built into software to reduce the dependency of the tax team on IT teams.
Balancing the books
While this breathing space will undoubtedly act in everyone’s favour, there’s one caveat. When we emerge from the COVID-19 crisis, the UK government will need to balance the books to support the national debt and collect every penny it is due. According to the IFS, government borrowing in the next financial year could be in excess of £175 billion, equivalent to more than 8% of national income and more than triple that forecast in Budget 2020.
It’s worth noting, too, that MTD is still regarded as a primary means of closing the tax gap. The latest published tax gap figures showed that avoidable mistakes made by taxpayers cost the Exchequer more than £9.9 billion in lost revenue. MTD for VAT was already forecast to deliver a reduction in the tax gap caused by error and failure to take reasonable care, leading to additional tax revenue (ATR) of £1.2 billion by 2023 to 2024, with steady state savings of around £300 million each year. The Chancellor of the Exchequer, Rishi Sunak, went further in the Budget, stating that “The government is investing in additional compliance officers and new technology from HMRC… enabling HMRC to further reduce the tax gap”.
So, come April 2021, we believe the government is going to expect big things from MTD and that means it’s likely that HMRC will have to come down harder than it has done to date on those that have not used the time wisely. This will probably take the form of penalties issued to those who have failed to comply with the digital links mandate because the argument will be that we’ve all had more than enough time to get our houses in order.