There numerous ways to comply with MTD for VAT phase 2. The core requirements are for the business to put in place digital records and digital links to create a digital end-to-end process but how the organisation achieves this is open to interpretation. HMRC outlines four main options in VAT Notice 700/22 but stresses the list is not exhaustive:
- Spreadsheet cells: Data can be transferred between spreadsheets using formulas or macros to link cells. Data is then submitted to HMRC via an API-enabled spreadsheet
- Import/Export or Download/Upload: Outputting transaction data from source data digital records into a digital format such as XML or CSV. This is then imported into the calculation spreadsheet or software to form a compliant digital link. Similarly, the upload/downloading of files is also considered acceptable
- Automated Data Transfer: Data is transferred between two systems within the business. This means it can be taken direct from accounting/ERP systems and uploaded into MTD software. Once the digital data is within this compatible software it’s possible to make adjustments
- Email/Portable Device: Spreadsheets containing digital records can be sent via email or a portable device such as a memory stick, flash drive etc to a recipient for import into MTD software.
While these options provide the business with a multiplicity of ways to become compliant, the range of choices can be confusing. To make an informed decision it is necessary to determine the advantages and disadvantages of each approach.
As can be seen from the table above, spreadsheets while likely to be the default option are much more prone to error. These can occur through formulas being wrongly applied or failing to work, macros that get broken when the spreadsheet grows, or plain simple human error, with figures entered incorrectly. Spotting these errors and tracing them to source can be difficult and they often don’t get noticed until a query comes back down the line, placing the business at risk of investigation. Over time, these problems are exacerbated as the spreadsheet grows in size and complexity. Ownership of the spreadsheet may also change hands, again making it difficult to corroborate how and when changes were made. In fact, it’s very difficult to make spreadsheets accessible for this very reason, resulting in key man dependency.
It’s worth bearing in mind that HMRC was reluctant to include spreadsheets in its plans for MTD initially and adopted an “anti-spreadsheet stance” according to press reports. It acquiesced to demands made by accountancy groups who lobbied hard to ensure spreadsheets were permitted for digital linking to minimise disruption. But it’s telling that spreadsheets have long been regarded as a major source of risk in the compliance process. HMRC audits will typically focus first and foremost on spreadsheet testing because of the likelihood of errors, with research suggesting this is the case with 88% of spreadsheets.
All roads lead to Rome
If we look closely at the other options, it becomes clear that many of these are also spreadsheet dependent. Import/export or upload/download will still require data to be entered and extracted from a spreadsheet. Data sent via email or saved on to a portable device will again use a spreadsheet. All roads, it would seem, lead back to the spreadsheet.
If we rule out spreadsheet dependent solutions, what we are left with from the list above is ‘Automated Data Transfer’. Capable of interfacing direct with accountancy systems, this option can allow compliance software to tap into data at source. Once data is entered into the return, it will still be necessary to perform amendments and adjustments so unless the solution is capable of permitting this in a closed environment, the business will still need to use a spreadsheet for this purpose.
As Example 7 in VAT Notice 700/22 states: “As the calculations in the spreadsheet are not required to be kept digitally in functional compatible software, the business can type the adjusted figures into its API accounting software. However, using a digital link for these processes, rather than a manual transfer, reduces the chance of errors.” What this means is that while digital linking isn’t required to perform amendments and adjustments, it is still a good choice in order to minimise the risk of error. The easiest way of doing these calculations in a digitally linked fashion is to make changes within the MTD software itself.
The alternative: the software compliance engine
If you’re looking to move away from the errors associated with spreadsheets as a part of your compliance strategy, then an MTD solution that allows amendments and adjustments to be carried out within the return process is a good idea. This type of MTD solution is often referred to as a ‘compliance engine’. It provides the ubiquitous access associated with automated data transfer, helping you to integrate with your existing accountancy systems, while utilising import/export to populate the nine boxes of the return. Data is mapped directly from ERP and accountancy systems (or can still be taken from a spreadsheet if required) and is imported into the engine where the return is completed and then submitted via the HMRC API.
Where compliance engines can come into their own is that they have the ability to transform the tax process and pave the way for compliance with other regimes under MTD. Compliance engines allow multiple activities to be undertaken without the need to step outside the process or use other software. This means complex calculations including group consolidations and partial exemption can be performed, improving accuracy and reducing workloads. Manual adjustments and amendments can be made within these solutions and corroborated against past obligations, payments and liabilities to check for anomalies. Plus, as new tax legislation is constantly added into the software, the compliance engine is kept up to date, ensuring the solution is always up to speed with regulatory changes.